Abstract: There are many state-owned enterprises (SOEs) that have lower average productivity and also have easier access to credit than private enterprises (POEs). The heterogeneity of credit constraints between SOEs and POEs exacerbates credit misallocation across sectors, which is a key feature of the existing distortions facing China's financial system. After the financial crisis of 2008, central banks around the world adopted macro-prudential policies as a supplement to monetary policy to achieve financial stability. In 2017, China formally established a double pillar regulatory framework of monetary policy and macro-prudential policy. What is the relation between monetary policy and macroprudential policy? How to coordinate between monetary policy and macro-prudential policy in this second-best environment with heterogeneous firms?
To answer these questions, financial frictions and enterprise heterogeneity are incorporated into a two-sector DSGE model to study the coordination effect of double pillar policy. Concretely, in our model, intermediate goods are produced by firms in two sector: one sector with SOEs and the other with POEs. Consistent with the institutional features of the Chinese economy, SOEs differ from POEs in their credit constraint and productivity. Using both numerical simulations and mathematical derivations, the formation of systemic risk and the coordination of double pillar policy in an environment with heterogeneous firms are studied.
The results show that the SOEs sector crowds out the demand for credit in the POEs sector, leading to inefficient allocation of credit resources, rising macro leverage of the economy, and increased systemic risks. In addition, in an environment with heterogeneous enterprises, macro-prudential policy can reduce macroeconomic leverage and prevent systemic risks by slowing down the credit market's pro-cyclical behavior and inhibiting the excessive expansion of credit scale, significantly improving social welfare losses. Moreover, the coordination of monetary policy and macro-prudential policy only slows down the amplification effect of the mortgage constraint mechanism on the business cycle, and failure to solve the distorting effect of heterogeneous enterprises on the economic structure.
This paper contributes to the literature in the following ways. First, a two-sector with different degrees of financial frictions DSGE model is built to analyze the influencing mechanism of financial frictions on systemic risks. Second, the coordination effect of double pillar policy on controlling the systematic risk caused by heterogeneous enterprises are investigated. Finally, the results provide new empirical evidence for the effects of double pillar policy on the structure of the economy.

Key words: heterogeneous enterprises, credit constraint mechanism, coordination mechanism of double pillar policy