The impact of credit control and interest rate regulation on the transforming Chinese economy: An analysis of long-run effects

After identifying the two major institutional features of the Chinese econo my, i.e., the coexistence of state-owned enterprises and private firms and tight governmental control over the financial sector, we incorporate these features into an endogenous growth model to investigate the long-run impact s of credit control and interest rate policies on the macroeconomic perform ance of the transforming Chinese economy. We find that (i) raising the inte rest rate on government bonds reduces the inflation rare without tempering the output growth rate, (ii) reducing the bank loans available to the stare -owned enterprises may lower both the inflation rate and the output growth rate, (iii) increasing the nominal interest rate on bank deposits will exer t a stagflationary effect on the economy, i.e., increasing the inflation ra te but reducing the output growth rate, and (iv) changing the nominal inter est rate on bank loans will have little real effect. (C) 2000 Academic Pres s.