A Dynamic Optimal Analysis On The Growth Effects Of Capital Account Liberalization

China is orderly in the process of capital accounts liberalization. Chinese colleagues have made fundamental research with the regard to the long and short run objectives, opening order of priority, as well as a good recognition of its risks on the way to capital accounts liberalization. However, the gains of capital accounts liberalization have not been studied deeply and remain controversial internationally.This paper surveys the positive effects of capital accounts liberalization, with a focus on economic growth and welfare improvement. In reference to the analysis on the growth effects of capital accounts liberalization, we first set up an initial model according to the main functionary channels of capital accounts liberalization. Then, we established a dynamic optimal model of endogenous economic growth involving the factor of financial development. Based on above all and the application of two-stage optimal control techniques, this paper studies the endogenous determination issue of capital liberalization, especially in terms of the optimal timing.As is pointed in this paper, capital accounts liberalization is an important factor that promotes financial development and economic growth. Capital accounts liberalization can improve the level of financial development and the functioning of financial systems. Thus the economy can break the restrictions of endogenous financing sources and invest with lower capital costs so as to spur the output and the effect on cross-period consumption.The optimal model in due form presented in the paper, based on the model of endogenous economic growth and with the capital accumulation equation including financial efficiency as a restricted condition, investigates the potential welfare benefit and the dynamic optimal growth path for small economy in open mode. The study also indicates, while all else the same, the capital liberalization can promote the financialefficiency, capital accumulation and output growth. Due to financial development, the transition rate from savings to capital and investment return have been accelerated, which raises national income and thus stimulate per capita consumption growth, the consumption at the point of opening the capital accounts may decrease.The conclusions of the dynamic optimal control analysis reveal clearly that, capital-rich countries can obtain definite open gains while the gains in capital-scarce countries will depends on how much their financial efficiency, productivity and human capital accumulation can be propelled by capital accounts liberalization.By applying the two-stage dynamic optimal technique in this paper, we find that with its assumptions, the necessary condition is not consistent with its sufficient condition concerning the optimal timing of capital accounts liberalization. Thereof the sole interior solution doesn't exist on the optimal selection of opening time, namely, no optimal timing of capital liberalization. Our model concludes that capital accounts openness has a quantitative coefficient with the extent of the improvements of financial efficiency and total factors productivity and constitutes a necessary or sufficient condition to the timing of capital accounts liberalization: immediate, never, or indifference between two above options.This paper proposes that, at the beginning of opening capital accounts, China should implement a phasing-in strategy of liberalization and put more emphasis on the cultivation of necessary prerequisites. When the reform makes proper progress, the betterment of financial efficiency is warranted or the capital becomes affluent, we can turn to a more rapid pace. Accordingly, the dynamic optimal controlling model suggest that the overall strategy of capital liberalization in China should be phased in eventually during the initial period and then developed at a relative fast speed, that is, Slow-earlier-Fast-later.The study stresses that capital liberalization will speed up the inflow of foreign capital in developing countries, but without the corresponding improvement of financial efficie...