Summary: As China is still in the transition stage, some enterprises bear the social and strategic policy burden, which leads to the decline of their own benefits. The government needs to provide explicit or implicit guarantee for their financing to ensure the normal operation of enterprises with social and strategic policy burden. As a result, some enterprises enjoy an advantage in obtaining credit, forming the problem of soft budget constraint in these enterprises. The soft budget constraint distorts the pricing mechanism of credit market and results in resource misallocation, which will have a negative effect on China's macroeconomy. Therefore, it is of great significance to study how to eliminate or weaken the adverse impact of soft budget constraint in some enterprises to effectively promote the development quality and long-term development of China's economy.

In order to evaluate what type of macroeconomic policies can mitigate the adverse impact of soft budget constraint, a credit collateral mechanism embedded with a soft budget constraint based on the theory of Kiyotaki and Moore (1997) is incorporated into a two-sector DSGE model. Concretely, in our model, intermediate goods are produced by firms in two sectors: one sector with soft-budget-constraint enterprises and the other with budget-constraint enterprises. Consistent with the institutional features of the Chinese economy, soft-budget-constraint enterprises differ from budget-constraint enterprises in their credit constraint and productivity. Specifically, soft-budget-constraint enterprises have higher leverage and lower productivity. Using both equilibrium analysis and numerical simulations, the impact of the soft budget constraint on macroeconomy and the effectiveness of macroeconomic policies are studied. Finally, we also conduct a counterfactual policy analysis through eliminating the differences of credit constraints faced by the two sectors.

The results of the study are as follows. First, the problem of the soft budget constraint will produce an asymmetric "financial accelerator" effect between the two sectors and lead to a higher macro leverage and a lower total factor productivity. However, enterprises with soft budget constraint can absorb idle labor in the economy, which reduces employment fluctuations. Second, the credit policy has a structural adjustment function, which can improve total factor productivity in the short term, but the effect of reducing macro leverage is not obvious. Although a macroprudential policy that regulates the firm-level leverage ratio can play a role in reducing the macro leverage ratio in the short term, it will be at the cost of a decline in total factor productivity. Third, deepening supply-side structural reforms and gradually eliminating soft budget constraint in enterprises can achieve policy objectives of significantly reducing macro leverage and improving total factor productivity. In the process of enterprises reform, the structural transformation and matching of labor force must be done in order to avoid rising unemployment.

Complementary to the literature, we build a two-sector with different degrees of financial frictions DSGE model to reveal the macroeconomic consequences of the optimal decision by Chinese heterogeneous enterprises. In addition, the results of policy analysis in this paper provide a reference for improving macro-control policies making, and our counterfactual analysis implies that the supply-side structural reform performs better than credit and deleveraging policies in improving the quality of economic development.

Keywords: soft budget constraint; macro leverage; total factor productivity; DSGE