The author investigates the effects of monetary policy in a distortionary economy consisting of two types of firms: State-Owned Enterprises (SOEs) and Private-Owned Enterprises (POEs). They mainly differ in the ability of getting loans from commercial banks. By modelling the differences between SOEs and POEs with dynamic stochastic general equilibrium model, the author solves the large equation system by Dynare, a platform running on Matlab.;In the first section, the author builds a simple Real Business Cycle model to examine the effect of a monetary policy shock in an economy where interest rate subsidy is identical to all firms with or without an interest rate subsidy. It verifies the money-neutrality of classical model and an identical subsidy with a technology shock will induce expansion in the economy. In the second section, the author adds sticky price and distortion to the RBC model and the distortion is measured by that only SOEs could be able to get the interest rate below the benchmark rate while POEs have to pay a capital rental tax to use capital. The result shows that an expansionary monetary policy could be able to increase output, consumption, capital and inflation but only last very shortly. Output will increase 4% after the shock and in the medium run, the output and inflation will return to mild level, nearly 0.5%. And to boost the economy you have to introduce more aggressive policies. The heterogeneity problem will not hurt the economy so much so long as the subsidy-favored sector has a larger share of the economy. This looks like the situation in China since state-owned economy still dominates and with the policy bias. It also corroborates the findings of some scholars that the quantity instrument has very limited effect.
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