China's Incentive Policies for Green Loans: A DSGE Approach
WANG Yao, PAN Dongyang, PENG Yuchao, LIANG Xi
International Institute of Green Finance & Institute for Finance and Economics, Central University of Finance and Economics; Institute for Sustainable Resources, University College London; School of Finance, Central University of Finance and Economics; Business School, University of Edinburgh
Summary:
In the context of attempts to ensure ecologically sustainable development in China, there has been an increase in “green finance” and “green loan” policies in recent years to promote the devotion of capital resources to sustainable development. Academic research in this area has grown tremendously. However, theories and models of green finance and policy analysis based on them remain inadequate. This study develops a theoretical and quantitative model to analyze Chinas incentive policies for green loans and applies this model to identify the likely effects of such policies. This will provide a prototype for modeling green financial policies in academia and help the government design such policies in the real world. In China, “green financial policy” normally means governmental and regulatory measures that promote financial services that support environmental improvement, climate change mitigation and adoption, and more efficient resource utilization. More narrowly, it refers to financial policy tools that incentivize green financing activities, such as interest subsidies, central bank relending, government guarantees, lowered risk weights, and reduced capital requirements for green loans (i.e. incentive policies). These policy tools have been proposed or implemented in the wake of the release of the Integrated Reform Plan for Promoting Ecological Progress in 2015 and the Guidelines for Establishing the Green Financial System in 2016 by the central government. While green financial policy has developed rapidly in practice, relevant academic research lags behind. Research on green financial policy has mostly involved qualitative policy recommendations. Quantitative research on green finance has begun to accumulate in recent years; however, few studies have focused on the economic and environmental effects of green financial policy. It is unknown whether this kind of policy is effective and what it will bring to the macro-economy. Given this background, this research aims to provide a theoretical model suitable for the quantitative analysis of incentive policies for green loans and to theoretically show their economic and environmental effects. The specific policy tools we study include interest subsidies, directional reduction for reserve ratio requirements, and central bank relending. To do this, we build a Dynamic Stochastic General Equilibrium (DSGE) model based on the Real Business Cycle (RBC) framework. The model makes two major extensions to the RBC framework. (1) The banking sector conducting green lending is added. The firm sector must use loans as “working capital” to pay for all costs. The bank provides green and traditional loans to different firms. The household sector can deposit savings to the bank. (2) The firm sector is divided into two sub-sectors: green and other firms. The pollution from the production process is introduced and the green firms pollutes less than other firms. Green firms are financed by green loans, while other firms are financed by traditional loans. These two extensions allow us to analyze financing activities and to distinguish green loans from traditional loans. Incentive policies for green loans can then be included after introducing the central bank and government sectors. Parametric data are calibrated from China. According to this model, we find the following: (1) All three policies (interest subsidies, directional reduction for reserve ratio requirements, and central bank relending) can increase the amount of green loans. Policy strength has a certain order. This shows the direct effects of such policies. (2) Temporary policy changes (incentives) can increase the output and employment of green firms while decreasing the output and employment of other firms. The total output, employment and pollution will also be negatively affected slightly, as will pollution emission. The positive impacts of policy are more significant than the negative impacts. This shows the indirect effects of such policies, including benefits and costs, for the entire economy and environment. (3) If the three policies are set endogenously in the economy as emission-pegged rules, they can also enhance the share of green-related variables in the economy. However, only when they reach a certain level of strength can the pegged policies bring about a green transformation of the economy in the face of productivity shock. The conclusion is that interest subsidies, directional reduction of reserve ratio requirements, and central bank relending are all effective ways of incentivizing green loans and have positive effects on the greening of the economy. The policy cost is not high. This implies that increased investment in green financial policy is desirable.
王遥, 潘冬阳, 彭俞超, 梁希. 基于DSGE模型的绿色信贷激励政策研究[J]. 金融研究, 2019, 473(11): 1-18.
WANG Yao, PAN Dongyang, PENG Yuchao, LIANG Xi. China's Incentive Policies for Green Loans: A DSGE Approach. Journal of Financial Research, 2019, 473(11): 1-18.
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