Research On Cross-border Capital Flows,Financial Stability And Macro Policy

With the acceleration of the opening of China’s capital account,cross-border capital flows have shown a trend of increasing volume and increasing volatility.It is true that cross-border capital flows have brought positive effects in promoting financial development,reducing capital costs,optimizing resource allocation,and improving capital market efficiency.On the other hand,due to the highly speculative and reversible characteristics of short-term capital flows,it poses a major challenge to a country’s financial stability and places higher demands on the level of financial governance.From historical experience,cross-border capital inflows have pushed up asset price bubbles,leading to excessive expansion of bank credit,while capital outflows triggered market panic and asset price bubbles burst,the rapid contraction of credit led to bankruptcy of enterprises,and may eventually evolve into a banking crisis and a currency crisis.In fact,the historical lessons of the 1994 Mexican financial crisis and the 1997 Asian financial crisis tell us that failure to properly handle the impact of cross-border capital flows will pay a heavy social cost.Therefore,in the context of China’s firm capital account liberalization,clarifying the impact of cross-border capital flows on financial stability from different perspectives,and exploring how to choose effective policy measures to prevent financial risks caused by cross-border capital flows is a problem urgently to be solved in China.This article focuses on the question of the impact of cross-border capital flows on financial stability and is dedicated to answering three core questions.First,what is the overall impact of cross-border capital flows on China’s financial stability? Second,through what important aspects does cross-border capital flow affect financial stability? Third,what policy tools should be adopted to deal with financial risks caused by cross-border capital flows? In order to answer the above questions,this paper first starts with a literature review and classic theory summarizing the impact of cross-border capital flows on financial stability,and then constructs China’s financial stability index and conducts an empirical analysis of the relationship between cross-border capital flows and financial stability indexes.Then this paper explored the two most significant perspectives of cross-border capital flows affecting financial stability-namely,the perspective of the generation and bursting of asset price bubbles and the perspective of bank risk-taking,and finally examined the effects of macro-prudential policies,monetary policies,and fiscal policies on preventing financial risks,and proposes policy recommendations at the end.In the first part of the study,this paper first selects 8 indicators from 4dimensions and uses the principal component analysis method to synthesize the financial stability index,then uses the TVP-SV-BVAR model to study exchange rate expectations,cross-border capital flows and financial stability index.At the same time,it explores the impact of capital flow reversal on financial stability.In addition,this article also divides cross-border capital flow shocks into positive shocks and negative shocks,and the state of financial stability is divided into increasing and decreasing.The results show that the exchange rate expectations,cross-border capital flows and the financial stability index constructed in this article have a clear linkage,but the impulse responses shown at different time points and different periods are not consistent.In recent years,with the deepening of financial opening policies,the impact of cross-border capital flows on financial stability is increasing.At the same time,the impact of capital flow reversal on financial stability does not necessarily appear as a negative impact,but the improvement of financial stability reduces the probability of capital flow reversal most of the time.In addition,the increase in capital inflows has a stronger impact on financial stability.Therefore,the Chinese government should be alert to cross-border capital inflows pushing up asset price bubbles.In the second part of the study,in order to explore the impact of cross-border capital flows on financial stability from the perspective of asset price bubbles,this article first uses the DCC-GARCH model to initially explore the dynamic correlation between cross-border capital flows and stock price returns.It was found that cross-border capital flows and stock prices and housing prices maintained a positive correlation for most of the sample,yet the trend of housing prices and capital flows has gradually decoupled in recent years.Then this paper uses the VECM model and iterative regression method to construct the stock price bubbles and the housing price bubbles,and uses the MS-VAR model to analyze the impact of cross-border capital flows on asset price bubbles under different regimes.Empirical results show that cross-border capital flows slowly push up asset price bubbles when the economy is running smoothly.However,under severe economic fluctuations,the relationship between cross-border capital flows and asset price bubbles shows a rather unstable correlation,thus increasing the risk of bursting bubbles.In addition,this paper examines the impact of housing prices as well as housing price bubbles on financial stability through provincial panel data.The results show that the impact of housing prices on financial stability presents a relationship of increasing first and then decreasing as housing prices rise,while housing price bubbles have significantly increased the level of credit defaults.Therefore,the government should pay attention to improving the ability of the financial market to resist cross-border capital flow fluctuations,and strengthen the prevention of asset price bubbles.In order to explore the perspective of bank risk-taking that cross-border capital flows affect financial stability,this paper incorporates short-term capital flows,bank risks measured by the Z value,and exchange rates,stock price returns and interest spread levels into TVP-SV-BVAR model.The impact of cross-border capital flows on bank risk is analyzed through different time points and different time periods,and the cross-border capital flows are divided into two states: increase and decrease.The empirical results show that the impact of cross-border capital flows has significantly increased bank risk,and the impact of the shock has considerable continuity in the medium and long term.In addition,the increase state in cross-border capital flows has increased bank risk for different periods,while the reduction in cross-border capital flows has only had the effect of reducing bank risks in the long run.Therefore,it is particularly important to improve the quality of credit review and reduce the moral hazard of banks when facing capital surges.In the third part of the study,this article first introduced the use of cross-border capital flow management policy tools under the IMF framework,followed by an empirical test of the effects of macro-prudential policies,monetary policies,fiscal policies and the combination of them on preventing financial risks,the study also focuses on the heterogeneous impact of enterprise ownership,scale,and liquidity.The results show that tight monetary policy will increase corporate risk exposure,and proactive fiscal policy will aggravate corporate risk exposure.Macro-prudential policies can not only effectively reduce corporate risk exposure,but also significantly ease the positive effect of monetary and fiscal policies on corporate risk exposure.effect.In addition,this paper finds that,compared with state-owned enterprises,China’s non-state-owned enterprises are more sensitive to the effects of monetary policy and macro-prudential policies,but fiscal policies can only ease the risk-taking level of state-owned enterprises.In addition,smaller companies are more susceptible to various policy tools,and companies with higher liquidity are more likely to benefit from macro-prudential policies.Therefore,we should insist on taking macro-prudential policies as the leading factor,strengthen the coordination of monetary and fiscal policies,and adopt differentiated measures according to the characteristics of enterprises.Compared with the existing research in this field,the contribution of this paper lies in:(1)When analyzing the asset price channels for the impact of cross-border capital flows on financial stability,it analyzes the deeper mechanism by which cross-border capital flows affect financial stability through asset prices,that is,cross-border capital flows cause the generation and bursting of asset price bubbles It also analyzes the impact of the bubble on financial stability,thereby clarifying the direction of the financial market to prevent cross-border capital flows.(2)This article pays special attention to the time-varying and nonlinear characteristics of the variable relationship in the process of China’s capital account opening and foreign exchange system reform.Non-linear models such as TVP-SV-BVAR,MS-VAR,and DCC-GARCH are used by this paper,making it possible to analyze the dynamic evolution of variable relationships.And in the empirical process,this article focuses on the nonlinear effects in different economic situations,thus enriching the amount of information and expanding the scope of application of the article.(3)When analyzing the effects of macro-prudential policies and other policy tools,this article explores the impact of policy tools on financial stability from the perspective of micro-enterprise risk-bearing,so that differences in the responses of different types of companies to policy tools can be observed.At the same time,this article improves the two pillar regulatory framework by taking consideration of fiscal policies.