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Capital account liberalization, external shocks and economic fluctuations of China

Author

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  • Sun, Zhaojun
  • Xu, Xiaoguang
  • Yang, Wen

Abstract

In this paper, we construct a large-scale DSGE model allowing different combinations of capital account liberalization's degree and foreign capital's level to figure out whether external shocks have significant impacts on China's economic fluctuations, to what extent are they affecting China's economic fluctuations at the present stage, and also in the future as further capital account liberalization. Our results show that external shocks are really important driving forces for China and although at the present stage, domestic shocks have dominant contributions to China's economic fluctuations, while external shocks will contribute more to the fluctuations of Chinese economy and will induce larger fluctuations to China's real economic variables as further capital account liberalization. Therefore, from the perspective of stabilizing the economy, we suggest capital account liberalization should still adhere to the principle of gradualism, not radicalism, and the Chinese government should establish a foreign capital supervision mechanism to monitor the total amounts of foreign capital.

Suggested Citation

  • Sun, Zhaojun & Xu, Xiaoguang & Yang, Wen, 2022. "Capital account liberalization, external shocks and economic fluctuations of China," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 220-240.
    • Handle: RePEc:eee:reveco:v:82:y:2022:i:c:p:220-240
    DOI: 10.1016/j.iref.2022.06.015
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    2. Liu, Jing & Chen, Zhonglu, 2023. "How do stock prices respond to the leading economic indicators? Analysis of large and small shocks," Finance Research Letters, Elsevier, vol. 51(C).

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    More about this item

    Keywords

    Capital account liberalization; Large-scale open economy DSGE model; Business cycle volatility;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • F6 - International Economics - - Economic Impacts of Globalization

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