Uncertainty, Endogenous Asset Portfolio, and Credit Distortion

We analyze the heterogeneous impact of uncertainty on large and small firms. Initially, we empirically examine the data of listed companies in China using local projection method and find that uncertainty has a significantly greater impact on small firms. Subsequently, we build a DSGE model incorporating heterogeneous firms and introduce an endogenous asset portfolio (EAP) mechanism. The EAP mechanism generates heterogeneous effects on the two types of firms through debt default risk, leading to dynamic differences in credit price and quantity. Under this mechanism, decisions by firms and banks contribute to credit distortion from both the demand and supply sides respectively. We observe that the degree of credit distortion is related to the initial default risk of firms. Policy simulations indicate that fiscal subsidy policies should focus on reducing the level of information asymmetry and should be reasonably combined with macro-prudential policies.