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Financial Frictions, Entry and Growth: A Study of China

33 Pages Posted: 14 Jul 2016 Last revised: 7 May 2017

Qiusha Peng

Cambridge Endowment for Research in Finance, University of Cambridge

Date Written: May 6, 2017

Abstract

With a focus on the entry channel, this paper investigates the role of business deregulation and financial reform in China's credit and stock markets in explaining the rapid economic growth of China over the past twenty years. A dynamic general equilibrium growth model with heterogeneous consumers and firms is developed. Quantitative results using firm-level data show that the structural reforms that facilitated business formation and growth led to significantly higher aggregate output. This was driven by resource reallocation resulting from stronger market competition, in particular caused by the massive influx of new firms. Policy analysis shows that further reform can also have a large impact.

Keywords: Structural Reforms, Entry, Market Selection, Economic Growth, China

JEL Classification: E23, E44, O40, O53

Suggested Citation

Peng, Qiusha, Financial Frictions, Entry and Growth: A Study of China (May 6, 2017). Available at SSRN: https://ssrn.com/abstract=2808148 or http://dx.doi.org/10.2139/ssrn.2808148

Qiusha Peng (Contact Author)

Cambridge Endowment for Research in Finance, University of Cambridge ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

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