In the financial contract literature collateral has been identified as serving as a screening device and sorting mechanism (Bester, 1985; Berger and Udell, 1990). The practical significance of collateral is recognized in recent studies on financial contracts in securing repayments, which put collateral as a primarily important factor in determining external financing and investment (Bernanke and Gertler, 1989; Kiyotaki and Moore, 1997; Chen, 2001a). In particular, Kiyotaki and Moore (1997) investigate exogenous shocks’ transmission mechanism of collateral channel through the interaction of credit constraints and the value of collateralized assets. Fluctuations in asset prices change the value of the collateral and affect the firm’s ability to obtain external financing, thus magnifying business fluctuations. Chen (2001a) extends the connection of collateral value and bank loans by taking banks’ financial characteristics into consideration, emphasizing the role of banks in affecting the amount of collateral-secured loans. Their models hence provide a theoretical link between fluctuations of collateral value, firms’ credit constraint, and the capacity of bank lending. Their models further imply that the leverage per dollar value of collateral is positively correlated with the (expected) value of the collateral.
The significance of firms’ collateral value on bank lending has been empirically examined in the literature, and most of the analyses are based on macro data. For instance, Kiyotaki and West (1996) and Ogawa et al. (1996) use macro time-series data to explain the investment behavior of Japanese firms in the 1990s and find that land value significantly affects investment behavior. Among those few that apply micro-data in their analysis, Ogawa and Suzuki (1998, 2000) use Japanese firm-level data and find that Japanese land value has a significant effect on the degree of borrowing constraint. These works, however, do not fully control for bank heterogeneity which can be important in explaining observed lending behavior and the collateral requirement.
China has had 15 years of unprecedented economic growth, which, to a significant extent, is related to a large scale movement of surplus labour from the low productivity rural sector to the high productivity urban sector.
Rural-urban migration provided Chinese industries with abandoned cheap labour and facilitated the fast growth of labour intensive manufacturing exports. Those who are interested in the issue of the sustainability of Chinese economic growth would be eager to learn the extent to which rural-urban migration can continue to drive the fast pace of economic growth.
In recent years, a new line of research on exchange rate determination, pioneered by the seminal work of Obstfeld and Rogoff (1995), has developed. The new approach examines exchange rate dynamics within dynamic general-equilibrium (DGE) sticky-price models. Examples of studies that use this approach include Betts and Devereux (2000), Chari, Kehoe, and McGrattan (2000a), Bergin and Feenstra (2001), and Kollmann (2001). In each of these studies, price stickiness is motivated through monopolistic competition in the goods market, while departures from the purchasing-power parity (PPP) are due to the failure of the law of one price (LOP) in traded goods. The latter feature arises from pricing to-market behaviour by monopolistic firms that segment markets by country.
