Does the Mundell-Fleming model fit in China?

Kai-Hua Wang (), Chi-Wei Su () and Ran Tao ()
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Kai-Hua Wang: Qingdao University-School of Economics, 308 Ningxia Road, Qingdao, Shandong, China
Chi-Wei Su: Qingdao University-School of Economics, No. 308 Ningxia Road, Qingdao, Shandong, China
Ran Tao: Qingdao Municipal Center for Disease Control & Preventation, No. 175 Shandong Road, Qingdao, Shandong, China

Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, 2019, vol. 37, issue 1, 11-28

Abstract: This paper examines the causal relationship between interest rate differential (IRD) and international short-term capital flow (SCF) to determine whether such a relationship in China supports the Mundell-Fleming model. With structural changes existing, we find that long-run relationship using full-sample data is unstable, suggesting that causality test is not reliable. Consequently, we use a time-varying rolling-window approach to revisiting the dynamic causal relationship, and the results show that IRD has both positive and negative impacts on SCF in several sub-periods, but SCF has no effect on IRD in China. When China suffers external and internal shocks, SCF should not be curbed only by adjusting IRD. Therefore, it is critical for policymakers to pay attention to specific backgrounds (e.g. economic situation, monetary policies) and further employ interest rate and fiscal policies in reducing negative influence from SCF on the Chinese economy.

Keywords: Mundell-Fleming model; short-term capital flow; interest rate differential; rolling window; time-varying causality (search for similar items in EconPapers)
JEL-codes: C32 F32 G18 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:rfe:zbefri:v:37:y:2019:i:1:p:11-28

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