Capital Account Liberalization,Economic Fluctuation And Optimal Monetary Policy Rule

In recent years,with the increasing appeal for China to open its capital account,more and more scholars begin to study the relationship between capital account liberalization and economic fluctuation.However,in their research,most domestic scholars start from the perspective of partial equilibrium,and consequently conclude with defective findings.With the increasing liberalization of capital account,should China adjust its current optimal monetary policies?Which types of monetary policies are really optimal?These are the questions that have yet to be explored.To make in-depth research on these questions,this thesis commences with a description and analysis of the basic facts of China's capital account liberalization through the TVP-VAR model.It proceeds to classify the flow of capital account into short-term capital(securities investment)control and long-term capital(direct investment)control.Further,this paper,from the perspective of general equilibrium,constructs a DSGE model that contains the inflow and outflow control of short-term capital and long-term capital by China and foreign countries so as to analyze,under varied capital flow controls,the impact of economic shock on the macro-economy and welfare loss of citizens of domestic and foreign countries,and explore the optimal monetary policies for China in accordance with the economic fluctuation and welfare loss of citizens under controlled capital flow.Through the analysis,we get the following findings:(1)Currently,long-term capital account liberalization can iron out the economic fluctuation in China.With respect to China's current liberalization of long-term capital account,both in case of the long-term capital flow between China and developed countries and that between China and developing countries,the economic fluctuations in foreign countries are greater,which means that China's current liberalization of long-term capital account can iron out its economic fluctuation.(2)From the perspective of welfare loss,if China encourages long-term capital flow and foreign countries limit long-term capital account,the welfare loss caused by exogenous shock for China and foreign countries will be the maximal.If China encourages long-term capital outflow and foreign countries allow free flow of long-term capital,the welfare loss caused by exogenous shock for China and foreign countries will be the minimal.Therefore,Chinese government should further promote the "going out" strategy,and boost the long-term capital outflow under the circumstance of free flow of capital in developed countries so as to enhance domestic economic and welfare level and that of the whole world at large.(3)Under current circumstance of limited control of short-term capital flow by Chinese government,different economic shocks will have varied impacts on the welfare loss of domestic and foreign citizens.Generally,domestic economic shock will cause greater welfare loss to domestic citizens,and economic shock of foreign countries will cause greater welfare loss to foreign citizens.(4)We should be prudent in liberalizing the short-term capital account.According to our analysis of the impulse response and volatility of the economic variables before and after the liberalization of short-term capital account,economic fluctuation is remarkable and citizen welfare is decreasing after liberalization of capital account.If the short-term capital account is further liberalized,economic fluctuation will be severer with greater decrease of citizen welfare.Therefore,liberalization of short-term capital account should be made with prudence.(5)Under China's current degree of capital account liberalization,in case of different economic shocks,quantitative monetary policy will cause the least welfare loss.While,comparatively,monetary policy with pegged exchange rate will cause the greatest welfare loss,with pricing monetary policy will cause welfare loss somewhere there between.However,the difference between welfare loss caused by quantitative monetary policy and that caused by pricing monetary policy is small,which means that Chinese financial market is imperfect in that the channel for the interest rate rule to adjust the economy is not smooth,but rather impeding the policy effect of the interest rate rule.Therefore,given the actual circumstance for China to liberalize its capital account,monetary policy with pegged exchange rate is not a good choice.On the basis of the analysis of this paper,we conclude that:First,Chinese government should further promote the "going out" strategy.Secondly,we should be prudent in liberalizing the short-term capital account.Thirdly,China should decide the right time to liberalize the short-term capital account in accordance with the change of the impact of different variables of macro economy.Fourthly,We should deepen the reform of the financial market to enhance the financial efficiency and improve the implementation environment for the pricing monetary policy.Lastly,in implementing the pricing monetary policy,our monetary authority should decide whether to adjust the instrumental variable pursuant to the movement of exchange currency rate on the basis of identifying the source of economic shock.