The effects of financial openness and financial efficiency on Chinese macroeconomic volatilities

Shenguo Yuan, Zhouheng Wu and Lanfeng Liu

The North American Journal of Economics and Finance, 2022, vol. 63, issue C

Abstract: This paper builds an open-economy DSGE model to study the effects of financial openness and financial efficiency on the macroeconomic volatilities and estimate the model with the Bayesian method and Chinese quarterly data from 2001Q1 to 2017Q4. We further test the validity of model predictions with panel analyses of Chinese provincial data from 1987 to 2016 and various robustness tests. The results show that: first, further financial openness will lead to an increase in output volatility but U-shaped changes in consumption and investment volatilities. Second, financial efficiency improvement helps to reduce the macroeconomic volatilities but has a diminishing marginal benefit. Third, our estimates of China's degree of financial openness and financial efficiency are both at the medium level close to the thresholds. It implies that further financial openness will dramatically increase the macroeconomic volatilities but whether financial efficiency improvement can mitigate instability is uncertain.

Keywords: Financial openness; Financial efficiency; Macroeconomic volatilities; DSGE model; Panel data analysis (search for similar items in EconPapers)
JEL-codes: E3 F3 F4 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:63:y:2022:i:c:s1062940822001541

DOI: 10.1016/j.najef.2022.101819

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