Enzo Dia / Lunan Jiang / Lorenzo Menna / Lin Zhang

CFDS Discussion Paper 2018/2


We document the existence of a substantial dispersion of interest margins charged by commercial banks among Chinese provinces, and we build a parsimonious dynamic stochastic general equilibrium model featuring both banking and production sectors that we calibrate at both the national and provincial level. Our model can explain a considerable share of the interest margin charged in di fferent provinces, and we find support for the hypothesis that Chinese banks adopt a similar technology  across di fferent provinces. Since in the case of Chinese provinces diff erences in wages are substantial, the adoption of a national technology implies an inefficient industrial structure for the banking industry. The adoption of a common nationwide technology generates also a stronger response of the rate on loans to productivity shocks than would be the case if banks adopted di fferent technologies in diff erent provinces, and the capability of banks to smooth regional idiosyncratic productivity shock hitting fi rms declines substantially.

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