Industrial Interaction and Credit Constraint: An Implication of Industrial Credit Policy in China

Abstract

I construct a multi-industry model to study the effects of industrial credit policies. This model features both industrial interaction and firm heterogeneity, and is calibrated to China's data. According to the calibrated parameters, in China, downstream firms face tighter credit constraint than upstream firms do. Based on China's current credit conditions, industrial credit policy experiments reveal three main results. First, upstream and downstream credit subsidies generate similar capital and labor productivity. Second, credit subsidy in a certain industry will substitute labor with capital in this industry, which is different from the case without credit constraint. Third, industrial credit policy will lead to resource reallocation among industries, and the extent of reallocation depends on the elasticity of substitution among intermediate inputs.