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How Does Capital Account Liberalization Affect Systemic Financial Risks? Evidence from China

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  • Zhiyong Zheng
  • Jian He
  • Yang Bian
  • Chen Feng
  • Mengting Zhang

Abstract

Capital account liberalization typically results in higher volumes of capital inflows and outflows for a country, yet abnormal cross-border capital flows may lead to overall financial risk accumulation, in turn causing tremendous damages to the economy. Using a time-varying parameter structural vector autoregression model with stochastic volatility (SV-TVP-SVAR), we identify time-varying effects of capital account liberalization on four types of systemic financial risks in China. Empirical results demonstrate that capital account liberalization, in the short run, can effectively curb the accumulation of macroeconomic and sudden stop risks. On the other hand, capital account liberalization may heighten credit crunch and asset bubble risks to varying degrees. We also find that some important capital account liberalization measures are double-edged: reform policies are likely to increase macroeconomic risk when optimizing the financing structure and reducing credit crunch risk.

Suggested Citation

  • Zhiyong Zheng & Jian He & Yang Bian & Chen Feng & Mengting Zhang, 2021. "How Does Capital Account Liberalization Affect Systemic Financial Risks? Evidence from China," Mathematical Problems in Engineering, Hindawi, vol. 2021, pages 1-13, April.
    • Handle: RePEc:hin:jnlmpe:5512471
    DOI: 10.1155/2021/5512471
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    Cited by:

    1. Zhu, Chaowei & Zhang, Fan & Zhang, Yuling, 2023. "Revisiting financial opening and financial development: A regulation heterogeneity perspective," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 181-197.

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