Financial Development,Capital Account Opening And Economic Growth

Economic growth is an eternal topic in economics theory,as well as one of the most important policy concerns.Researchers keeps seeking to recognize the energy source of economic growth,however in the past decades countries all over the world have experienced quite different growth rates,which vary not only across countries,but also in time series.In the same period,domestic financial development and capital account liberalization in most economies also shows extraordinary changes comparing to the original status.Thus,is there still any direct or indirect linkage among these three variables? The reasonable answer to this question would bring quite meaningful help to our current task of domestic financial liberalization and capital account opening.This paper aims at describing the relationship between financial development,capital account opening and economic growth,as well as the crucial role played by domestic financial development.Considering the historic process of various countries,we can see that the overall effect brought by capital account opening to economic growth could not be easily explained.By and large,the effect relies on several basic factors in host country,and financial development is one of the most important.Thus,including financial development will be necessary when studying the linkage between capital account opening and economic growth.The existing literature related to the topic of this paper can be roughly divided into four categories: research on the significance of financial development against economic growth;on the linkage between capital account opening and economic growth;on the mutual effect between financial development and capital account opening;and on the comprehensive analysis of the three variables.Basically,the significance of financial development has reached a common view,but the linkage between capital account and economic growth remains ambiguous.Partly because of the different concerning points and empirical methods used in the studies,there are three types of conclusions about this topic.Among them,some researchers have realized the importance of financial development in this issue,which makes a reasonable starting point of further study.Constructing a theoretic model and applying several different empirical strategies to handle with the three variables together will be the core concern and innovation of this paper.To begin with,the historic process of financial development and capital account opening of different economies should be studied first.During the last decades,obvious changes of these two issues have appeared in most countries,which adds to the complexity of the main topic.Still,several key features and lessons can be drawn from the retrospection:1.Gains and losses in the practice of financial development shows nonlinear feature when focusing on the linkage between financial development and economic growth.2.Also,the relationship between capital account opening and economic growth shows nonlinear feature.3.Financial development and capital account opening are closely related in the current background of global integrity.On the one hand systemic risk gets easier to transmit across countries,and on the other hand domestic financial development largely affects the growthenhancing mechanism of capital account opening.To validate these conclusions,this paper proceeds with a simple theoretic model.Under the traditional framework of welfare economics theory,capital is no more than a normal goods.As capital account opening could reduce the friction in capital market,it should generate similar welfare effect just like in the goods market.Nevertheless,the historic review has already warned us that this issue should not be simply treated in the traditional welfare framework.Thus,this paper focus on the intrinsic quality of financial transaction.Comparing with transaction of normal goods,the most outstanding character of financial transaction would be the intertemporal feature and information asymmetry.This brings out default problem and financing restriction,which could finally affect economic growth while this sort of friction exists widely in the actual production process.According to this thought,this paper constructs a general equilibrium model based on the optimal problem of two types of entrepreneurs as well as workers.After calculating the feature of steady state,a relationship between domestic interest rate and financial development can be drawn from the model,and the effect of capital account opening can be also analyzed in this framework.The core conclusion of this part is:1.According to the different level of financial development,the domestic economic growth rate shows nonlinear feature.2.The overall effect of capital account opening on economic growth also shows nonlinear feature.To be more precise,only when the level of domestic financial development reaches a certain threshold can the growth-enhancing effect of capital account opening hold with certaintyThese two conclusions fit the early conclusions in the historic review part quite well.Nevertheless,other mechanisms also exist in the real economy,which makes a further empirical study necessary to answer the original question more reasonably.In the rest part,this paper focus on the empirical study as suggested in the last step.The first strategy is to examine the nonlinear feature of the relationship between financial development and economic growth,as well as the relationship between capital account opening and economic growth.By adding into the OLS equation the quadratic term of financial development index or capital account opening index,the above nonlinear feature is revealed and confirmed.The next strategy is to examine the threshold effect of financial development.A panel threshold method is applied to proceed the study,and the core conclusion of this part is:According to the different level of financial development,the relationship between capital account opening and economic growth can be significantly negative,insignificant,and significantly positive.This conclusion is consistent with conclusions drawn from historic review and theoretic model analysis.An additional examine shows the human resource quality and trade openness are also threshold variables.To confirm the conclusion above,this paper selects the 33 countries whose financial development index is beyond the second threshold point,which implies the growth-enhancing effect should be significant in this new sample.A GMM technic is applied to estimate the dynamic panel model,and the outcome is consistent with the expectation.It is noteworthy that China is also in the new sample after 1990,which means the financial system has gained enormous improvement after decades of fostering.However,in the real economy of China various factors can add to the complexity of the linkage between capital account opening and economic growth.Whether the financial system is steady enough to guarantee the growth-enhancing effect of capital account opening,need a further empirical study to make clear.Chapter 7 is focusing on this issue.After a quick review of financial development and capital account opening in the last decades,this paper turns to construct a VAR model to examine the long-run relationship between financial development,capital account opening and economic growth in China.Two main conclusions can be drawn:1.Capital account opening leads to significant enhancing of economic growth in the short-run,however in the long-run this effect weakens.2.Financial development does not bring significant positive effect to economic growth in the short-run,while in the long-run the positive effect is still significant.In the concluding part,this paper puts forward several policy advices based on the conclusions drawn earlier.To maximize the growth-enhancing effect,we may consider the following strategies: to enhance the level of financial liberalization and financial regulation;to comprehensively promote capital account opening with reasonable order;to ensure a better legal system and keep the economy attractive to high-quality international investment;to optimize the structure of capital inflow and ensure a more balanced regional structure in the economy system.