The Effects of Financial Decoupling of the U.S. and China: Simulations with a Global Financial CGE Model

Peter Dixon, James Giesecke, Jason Nassios and Maureen Rimmer

Centre of Policy Studies/IMPACT Centre Working Papers from Victoria University, Centre of Policy Studies/IMPACT Centre

Abstract: We add a financial module to the GTAP model, built around an 18-region asset-liability matrix. We simulate financial decoupling between the U.S. and China. We find that the U.S. would gain by limiting its capital flows to China, leading to a redirection of finance to the domestic economy. This would stimulate investment in the U.S. with favorable effects on employment, capital stocks, real GDP, wealth and real wage rates. At the same time investment in China would decline with negative effects on the Chinese economy. Similarly, China would gain by limiting its capital flows to the U.S. and the U.S. would lose. In a tit-for-tat situation in which each country reduces its financial-asset holding in the other country by x per cent, the winner would be China. We conduct additional simulations to compare the effects of trade decoupling with those of financial decoupling.

Keywords: Financial decoupling; U S -China economic relations; Trade decoupling; Financial module in GTAP; CGE simulations (search for similar items in EconPapers)
JEL-codes: C68 F17 F37 F51 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-cmp, nep-cna and nep-int
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Published in Dixon, P.B., J.A. Giesecke, J. Nassios and M.T. Rimmer (2021), "Finance in a global CGE model: the effects of financial decoupling between the U.S. and China", Journal of Global Economic Analysis, forthcoming.

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