4. Conclusions
Heterogeneous borrowing constraints in the production sector alters the traditional transmission mechanism of macroeconomic shocks in several aspects. In this paper, we construct a DSGE model including land as a production input with heterogeneous sectors tailored to the China economy, and use it to explain the dynamic link between real land price and heterogeneous investment behavior found in empirical literature. Our quantitative general equilibrium model confirms the existence of the “collateral channel” for private firms in China, in a way that avoids the potential endogeneity problems embedded in existing empirical methods. A new “crowding out” channel has been identified through simulation analysis, which gives a legitimate explanation to the negative relationship between real estate price and state-owned firm's investment. The findings in this paper have important policy implications. For example, the government is advised to take into account accordingly the induced change of investment behavior of the state-owned and private firms before implementing measures to influence real estate price. As the capital reallocation in production sectors may incur unintended welfare loss to the whole economy.
