Capital account liberalization, external shocks and economic fluctuations of China

Zhaojun Sun, Xiaoguang Xu and Wen Yang

International Review of Economics & Finance, 2022, vol. 82, issue C, 220-240

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.

Keywords: Capital account liberalization; Large-scale open economy DSGE model; Business cycle volatility (search for similar items in EconPapers)
JEL-codes: C3 E32 E37 F6 (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:reveco:v:82:y:2022:i:c:p:220-240

DOI: 10.1016/j.iref.2022.06.015

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