On The Financial Accelerator Effect Of China’s Credit Market

Different macroeconomic schools have different interpretations of economic fluctuationsand the transmission mechanism. Real business cycle theory emphasizes the impact of realvariables on the economy, such as technology shocks and government purchase, whileNew-Keynesian School pays more attention to the role of monetary policy. However, thesetwo schools have ignored the financial market’s role in economic fluctuations, in other words,they assume that Modigliani-Miller theorem stand up and the financial structure does notaffect the real economy. Financial accelerator theory breaks through the traditional economiccycle theory, explains economic fluctuations and the transmission mechanism in a newperspective. Thus, the role of financial factors in the economic cycle is re-established.China is still a "bank-based" financing system, and compared with the indirect financing,direct financing is still too small. Since reform and opening, China’s SMEs have a rapiddevelopment and they play an important role in the socio-economic development, but thefinancing problem of SMEs in China still has not been satisfactorily resolved. In addition,from1998, China’s business cycle shows a shape of ramp up sharp down. These phenomenaseem to suggest the existence of China’s financial accelerator effect. Financial acceleratoreffect in the credit market is an important theoretical problem, but also an important practicalissue. The study of China’s financial accelerator effect in the credit market and its mechanismfor macroeconomic fluctuations has a far-reaching practical significance.With Bernanke’s financial accelerator theory as a theoretical basis, combined withChina’s special economic background, the author studies China’s financial accelerator effect inthe credit market. In the introduction part of this paper the author proposes three questions:First, does a micro-foundation of financial accelerator effect exist in China’s credit market?Second, is the financial accelerator effect in China’s credit markets asymmetric? This is theessential characteristic of the financial accelerator effect; which exogenous shocks’ financialaccelerator effect is more significant; What kind of impact will it has on China’smacro-economic operation? Third, how to overcome the adverse impact of financial accelerator effect on the economy so as to improve China’s macro control policies’scientificalness and effectiveness?After summarizing the existing literature，the author studies the historical changes inChina’s credit market. The study shows that1998is a watershed in China’s credit marketreform. From then, a market-oriented credit market was gradually built to serve the furtherdeepening of market-oriented economy and the interest rates market-oriented reform started.Therefore, the study of China’s financial accelerator effect before1998has little practicalsignificance. The study also shows that there are some problems in China’s credit market,which form a solid realistic foundation of China’s financial accelerator effect.In chapter four the author constructed a simple neoclassical model of business cycle toshow the financial accelerator effect in the business cycle. In the model, borrowers’ balancesheet positions play an important role. The mechanism is that higher borrower net worthreduces the agency costs of financing real capital investments. Business upturns improve networth, lower agency costs, and increase investment, which amplifies the upturn; vice versa,for downturns. This simple model illustrates the basic principles of the financialaccelerator, and it is a theoretical basis for the next empirical study.In the fifth chapter, the author perform an empirical test on the micro-foundation ofChina’s financial accelerator effect with647listed companies’ annual data in China from1999to2010and a dynamic panel data model. Three conclusions are reached: first, within thescope of the study sample, borrowers’ balance sheet positions play an important role in thefirms’ investment; second, in downturns, balance sheet positions are more important inexplaining firm investment spending than in other times; third, compared to medium and largeenterprises, the financial accelerator effect in small enterprises is more obvious. Therefore, theexistence of the micro-foundation for China’s financial accelerator effect is confirmed.In Chapter6, using the monthly data of China from January1999to December2010,through a threshold VAR model, the author take an empirical test on China’s financialaccelerator effect in the credit market at the macro level. The conclusion shows that, Chinahas a significant financial accelerator effect with non-linear characteristics, and the financial accelerator effect caused by the credit impact is most significant. In addition, through thehistorical decomposition of economic growth, we find that the credit market is an importantsource of macroeconomic fluctuations as well as a non-linear transfer intermediary in theprocess. Obviously, using the financial accelerator theory we can reasonably partly explainsome of China’s macroeconomic volatility characteristics.On the foundation of Analysis in the previous text, the author gives some policyimplications about China’s financial accelerator effect in Chapter seven. As regards the creditmarket reform and development, we should establish a multi-level structure credit market, andimprove China’s social credit system. In respect of SME financing problem, the SMEs shouldimprove their financing capability and the government should optimize the externalenvironment for SME financing. With respect to the macro-control policy, first, thegovernment should raise its ability to accurately grasp the trend of the economy; second, thegovernment should pay attention to the financial accelerator effect caused by the time lag;third, the Government should develop differentiated macro-control policies according to thefirm size, reflecting the consideration for SMEs’ financing difficulties, so as to weaken thefinancial accelerator effect, protect employment.