Many countries try to mitigate business cycle fluctuations by regulating the activities of their banks. We develop a theoretical framework to study the endogenous response of the banking sector and the implications for the aggregate economy. Under fairly mild conditions, we find that stricter liquidity standards can generate unintended credit booms as attempts to arbitrage the regulation change the allocation of savings across banks and the allocation of lending across markets. We then apply our framework to study recent events in China. We show that a regulatory push to increase bank liquidity and cap loan-to-deposit ratios in the late 2000s accounts for one-third of China ’s unprecedented credit boom and one-half of the increase in interbank interest rates over the same period. We also find strong empirical support for the cross-sectional differences between big and small banks predicted by the model.
This paper studies how the abolition of an elite recruitment system—China's civil exam system that lasted over 1,300 years—affects political stability. Employing a panel data set across 262 prefectures and exploring the variations in the quotas on the entry-level exam candidates, we find that higher quotas per capita were associated with a higher probability of revolution participation after the abolition and a higher incidence of uprisings in 1911 that marked the end of the 2,000 years of imperial rule. This finding is robust to various checks including using the number of small rivers and short-run exam performance before the quota system as instruments. The patterns in the data appear most consistent with the interpretation that in regions with higher quotas per capita under the exam system, more would-be elites were negatively affected by the abolition. In addition, we document that modern human capital in the form of those studying in Japan also contributed to the revolution and that social capital strengthened the effect of quotas on revolution participation.
Some firms have achieved good performance in developing countries where the financial sector is far from established. One explanation in the literature is that these firms benefit from trade credit, a form of informal financing. Using a survey of firms in China conducted by the World Bank in early 2003, this article examines whether trade credit indeed boosts firm performance. Our ordinary least squares results show that trade credit is significantly and positively correlated with firm performance. However, using the instrumental variable approach to address endogeneity, we find that the statistical significance disappears. The results are robust to a series of robustness checks, casting doubt on the claim that trade credit boosts firm performance.
This study conducts a long-run analysis on the trends and components of Chinese saving rates from 1953 to 2012. We identify two structural changes in aggregate saving rates around 1978 and 2001, and examine them through a decomposition analysis of the income distribution and sector-specific saving rates. The following key findings are obtained. First, the major trends and compositions of Chinese saving rates changed markedly over the period considered, which explains the changes of aggregate saving rates with the dramatic economic transition from a planned economy to a market-oriented economy. Second, we investigate the surge in aggregate saving rates from 2001 to 2012 based on a series of institutional factors, such as the evolving labour market, domestic economic policy adjustments and changes in external economic conditions caused by China's accession to the World Trade Organization in 2001 and the 2008 global financial crisis. Finally, we present the future prospects for the high aggregate saving rates in China based on several evolving economic, demographic and policy trends. We argue that Chinese saving rates have peaked in recent years and that a declining trend is expected, which will contribute to the economic rebalancing of the country.
Many countries try to mitigate business cycle fluctuations by regulating the activities of their banks. We develop a theoretical framework to study the endogenous response of the banking sector and the implications for the aggregate economy. Under fairly mild conditions, we find that stricter liquidity standards can generate unintended credit booms as attempts to arbitrage the regulation change the allocation of savings across banks and the allocation of lending across markets. We then apply our framework to study recent events in China. We show that a regulatory push to increase bank liquidity and cap loan-to-deposit ratios in the late 2000s accounts for one-third of China ’s unprecedented credit boom and one-half of the increase in interbank interest rates over the same period. We also find strong empirical support for the cross-sectional differences between big and small banks predicted by the model.
This paper studies how the abolition of an elite recruitment system—China's civil exam system that lasted over 1,300 years—affects political stability. Employing a panel data set across 262 prefectures and exploring the variations in the quotas on the entry-level exam candidates, we find that higher quotas per capita were associated with a higher probability of revolution participation after the abolition and a higher incidence of uprisings in 1911 that marked the end of the 2,000 years of imperial rule. This finding is robust to various checks including using the number of small rivers and short-run exam performance before the quota system as instruments. The patterns in the data appear most consistent with the interpretation that in regions with higher quotas per capita under the exam system, more would-be elites were negatively affected by the abolition. In addition, we document that modern human capital in the form of those studying in Japan also contributed to the revolution and that social capital strengthened the effect of quotas on revolution participation.
Some firms have achieved good performance in developing countries where the financial sector is far from established. One explanation in the literature is that these firms benefit from trade credit, a form of informal financing. Using a survey of firms in China conducted by the World Bank in early 2003, this article examines whether trade credit indeed boosts firm performance. Our ordinary least squares results show that trade credit is significantly and positively correlated with firm performance. However, using the instrumental variable approach to address endogeneity, we find that the statistical significance disappears. The results are robust to a series of robustness checks, casting doubt on the claim that trade credit boosts firm performance.
This study conducts a long-run analysis on the trends and components of Chinese saving rates from 1953 to 2012. We identify two structural changes in aggregate saving rates around 1978 and 2001, and examine them through a decomposition analysis of the income distribution and sector-specific saving rates. The following key findings are obtained. First, the major trends and compositions of Chinese saving rates changed markedly over the period considered, which explains the changes of aggregate saving rates with the dramatic economic transition from a planned economy to a market-oriented economy. Second, we investigate the surge in aggregate saving rates from 2001 to 2012 based on a series of institutional factors, such as the evolving labour market, domestic economic policy adjustments and changes in external economic conditions caused by China's accession to the World Trade Organization in 2001 and the 2008 global financial crisis. Finally, we present the future prospects for the high aggregate saving rates in China based on several evolving economic, demographic and policy trends. We argue that Chinese saving rates have peaked in recent years and that a declining trend is expected, which will contribute to the economic rebalancing of the country.
