Growing (with Capital controls) like China

Zheng Song, Kjetil Storesletten, Fabrizio Zilibotti

Research output: Contribution to journalReview articlepeer-review

21 Scopus citations


This paper explores the effects of capital controls and policies regulating interest rates and the exchange rate in a model of economic transition applied to China. It builds on Song, Storesletten, and Zilibotti (2011) who construct a growth model consistent with salient features of the recent Chinese growth experience: high output growth, sustained returns on capital investment, extensive reallocation within the manufacturing sector, sluggish wage growth, and accumulation of a large trade surplus. The salient features of the theory are asymmetric financial imperfections and heterogeneous productivity across private and state-owned firms. Capital controls and regulation of banks' deposit rates stifle competition in the banking sector and hamper the lending to productive private firms. Removing such regulation would accelerate the growth in productivity and output. A temporarily undervalued exchange rate reduces real wages and consumption, stimulating investments in the high-productivity entrepreneurial sector. This fosters productivity growth and a trade surplus. A high interest rate mitigates the disadvantage of financially constrained firms, reduces wages, and increases the speed of transition from low-to high-productivity firms.

Original languageEnglish (US)
Pages (from-to)327-370
Number of pages44
JournalIMF Economic Review
Issue number3
StatePublished - Jan 1 2014
Externally publishedYes

Bibliographical note

Funding Information:
*Zheng Song is an Associate Professor of Economics at University of Chicago Booth. Kjetil Storesletten is a Professor of Economics at University of Oslo. Fabrizio Zilibotti is the Chair of Macroeconomics and Political Economy at University of Zürich. The authors are the recipients of the 2012 Sun Yefang Award for the article “Growing Like China” (AER, 2011). The authors thank for comments Pierre-Olivier Gourinchas, Ayhan Kose, two referees and seminar participants in the IMF-Bank of Korea conference “Asia: Challenges of Stability and Growth,” Seoul, September 26–27, 2013. Financial support from the European Research Council (ERC Advanced Grants IPCDP-229883 and 324085) and from the Research Council of Norway (162851, 179522 ESOP, and 183522) is gratefully acknowledged.

Publisher Copyright:
© 2014 International Monetary Fund.


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