Advances in Economics, Management and Political Sciences

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Proceedings of the 7th International Conference on Economic Management and Green Development

Series Vol. 34 , 10 November 2023


Open Access | Article

The Impact of Government Intervention on Firms' Investment Decisions in China: An Extension in the IS-LM Model

Ziqi Zhang * 1
1 High School Affiliated to Shaanxi Normal University

* Author to whom correspondence should be addressed.

Advances in Economics, Management and Political Sciences, Vol. 34, 13-18
Published 10 November 2023. © 2023 The Author(s). Published by EWA Publishing
This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Citation Ziqi Zhang. The Impact of Government Intervention on Firms' Investment Decisions in China: An Extension in the IS-LM Model. AEMPS (2023) Vol. 34: 13-18. DOI: 10.54254/2754-1169/34/20231666.

Abstract

This essay examines how government interventions affect the firms in China, where political connections are valued as one of the essential factors in this fast-growing economy. This research aims to show that the Chinese government treats SOEs and non-SOEs differently by offering different interest rates. This paper contributes to allowing the policymakers to notice the difference in the responsiveness of SOE and non-SOEs investment. The government can plan its expansionary policy schemes by setting the interest rates according to the relative sensitivities of firms to overcome economic fluctuations. The primary methodology is an extension of the IS-LM model, which studies how the exogenous change in policies affects the equilibrium level of income. According to the correlation analysis, SOE investment has an intense negative relationship with interest rates. Still, the non-SOE investment is less responsive than the SOE investment, although it also has an opposite trend with the interest rates. This study modifies the IS-LM curve based on Chinese government intervention behavior and contributes to the further exploration of the investment behavior of firms under policy changes. The Chinese economy is currently rebounding from the aftermath of the pandemic, as the government abandoned its Zero-COVID regime. China’s policy-induced recovery will generate a considerable contribution to global growth according to the IMF’s forecasts, released on January 30th, 2023. This research topic is necessary to be developed as it studies the reaction of firms when the government applied its policy tools to spur the economy.

Keywords

interest rates, state-owned enterprises (SOEs), non-state-owned enterprises (Non-SOEs), investment, policy

References

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2. Deng, L., Jiang, P., Li, S., & Liao, M.: Government intervention and firm investment. Journal of Corporate Finance, 63, 101231 (2020).

3. Chen, S., Sun, Z., Tang, S., & Wu, D.: Government intervention and investment efficiency: Evidence from China. Journal of Corporate Finance, 17(2), 259-271 (2011).

4. Fan, J. P., Wong, T. J., & Zhang, T.: Politically connected CEOs, corporate governance, and Post-IPO performance of China's newly partially privatized firms. Journal of financial economics, 84(2), 330-357 (2007).

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8. Mankiw, N. G.: Principles of macroeconomics. Cengage learning. (2020).

9. King, R. G.: The new IS-LM model: language, logic, and limits. FRB Richmond Economic Quarterly, 86(3), 45-104 (2000).

10. Zou, L., & Sun, L.: Interest rate policy and incentives of state-owned enterprises in the transitional China. Journal of Comparative Economics, 23(3), 292-318 (1996).

Data Availability

The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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Volume Title
Proceedings of the 7th International Conference on Economic Management and Green Development
ISBN (Print)
978-1-83558-089-9
ISBN (Online)
978-1-83558-090-5
Published Date
10 November 2023
Series
Advances in Economics, Management and Political Sciences
ISSN (Print)
2754-1169
ISSN (Online)
2754-1177
DOI
10.54254/2754-1169/34/20231666
Copyright
© 2023 The Author(s)
Open Access
This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited

Copyright © 2023 EWA Publishing. Unless Otherwise Stated