| With global financial liberalization and financial deepening,the situation of global capital flows is constantly changing,making the probability of global financial crises and financial instability events on the rise,and the huge impact of the outbreak of financial crises on the global economy and finance has gradually caused scholars from various countries to ponder on financial stability.At the same time,the continuous development of financial deepening has also triggered research on the nature and impact of international capital flows on financial stability and the adoption of countermeasures.Against the backdrop of increased uncertainty about the direction of global capital flows,a series of exchange rate fluctuations and financial instability caused by international capital flows have increasingly become the focus of academic attention.This paper studies the relationship between short-term international capital flows,RMB exchange rate fluctuations and financial stability,which is of great theoretical and practical significance to the current capital account and financial opening in China,exchange rate reform,and the management of short-term international capital flows and financial stability.This paper examines the dynamic relationship between short-term international capital flows,the RMB exchange rate and China’s financial stability,starting from short-term international capital flows,and the specific research ideas are as follows.Firstly,short-term international capital flows can have an impact on a country’s financial stability.The current development of global financial integration and financial deepening provides room for inter-country capital inflows and outflows.Based on the nature of short-term international capital flows,large-scale short-term international capital flows can have a huge impact on a country’s financial institutions,financial markets and macro-economy.Secondly,there is a reciprocal relationship between short-term international capital flows and the RMB exchange rate.Before short-term international capital flows into China,foreign currency needs to be converted into RMB in the foreign exchange market for investment,and changes in demand for RMB in the foreign exchange market will cause changes in the RMB exchange rate.And exchange rate volatility may further affect international investors’ confidence,exacerbating short-term capital inflows or outflows.Thirdly,exchange rate volatility can have an impact on financial stability.Expectations of exchange rate appreciation could cause massive inflows of international capital and even become a target for exchange rate speculators in international financial markets;however,an expected depreciation of the exchange rate could cause panic in financial markets,and speculators could launch attacks on the foreign exchange rate.The subsequent sharp fall in the value of the currency would eventually lead to the outbreak of a financial crisis.Finally,based on the above analysis,short-term international capital flows,the RMB exchange rate and China’s financial stability are brought under the same framework to analyse and empirically test the dynamic relationship between the three,and relevant policy recommendations are made.The main findings of this paper are as follows.1.China’s financial stability is generally on an upward trend and has some self-healing capacityThis paper constructs a set of basic indicators for China’s financial stability index,obtains the weights of each basic indicator through principal component analysis,and synthesizes a comprehensive index of China’s financial stability(CFSI).Overall,China’s financial stability from the first quarter of 2004 to the fourth quarter of 2021 shows a general upward trend in volatility,and reaches its highest value in the first quarter of 2020.In addition,by constructing a vector error correction model(VECM),this paper obtains a significant error correction coefficient for the CFSI equation under the VECM model,and the error correction coefficient corrects the deviation of the actual value of CFSI from the equilibrium value by about 23%,which is a relatively fast adjustment,indicating that China’s financial system is able to correct the impact caused by other economic variables relatively quickly and can This indicates that the Chinese financial system is able to correct the impact of other economic variables relatively quickly and can return to long-term equilibrium within a relatively short period of time.2.Significant impact of short-term international capital flows on China’s financial stabilityThis paper investigates the impact of short-term international capital on financial stability.By constructing a vector error correction model(VECM),we empirically test the dynamic relationship between short-term international capital flows and three other types of international investment(foreign direct investment capital,international portfolio investment and other investment capital)on China’s financial stability.The estimation results of the model indicate that short-term international capital flows have the most significant impact on China’s financial stability among the four types of international capital flows.In addition,the results of the Granger causality test and impulse response analysis further support the estimation results of the VECM model.According to the impulse response analysis,short-term international capital inflow shocks have a dampening effect on China’s financial stability in the short run,but in the long run,short-term international capital inflow shocks gradually change from a negative to a positive effect.3.There is a two-way interaction between short-term international capital flows and the RMB exchange rateShort-term international capital inflows will cause the RMB exchange rate to appreciate,while the appreciation of the RMB exchange rate will further cause more short-term capital inflows to China.Therefore,there is not only an interaction between the two,but also a positive and reinforcing feedback mechanism,which can work through an indirect transmission mechanism.Firstly,the estimation results of the MS-VAR model suggest that there is a two-way relationship between short-term international capital flows and RMB exchange rate fluctuations;secondly,both impulse response results under the MS-VAR model and the TVP-SV-VAR model confirm the positive reinforcing feedback mechanism between short-term international capital flows and the RMB exchange rate;finally,there is an indirect transmission mechanism between short-term international capital and the RMB exchange rate.Finally,there is an indirect transmission mechanism between short-term international capital flows and the RMB exchange rate,i.e.the fluctuations of short-term international capital flows and the RMB exchange rate can be affected by the indirect transmission mechanism through the balance of payments,relative interest rates and inflation.4.There is a dynamic relationship between short-term international capital flows,the RMB exchange rate and China’s financial stabilityIn this paper,we analyse the dynamic relationship between these three factors through theoretical analysis and construct a TVP-SV-VAR model to empirically test the dynamic relationship between short-term international capital,RMB exchange rate and financial stability in China.Firstly,short-term international capital inflows will have a negative impact on China’s financial stability in the short run,while moderate short-term capital inflows are beneficial to maintaining China’s financial stability in the long run;secondly,fluctuations in the RMB exchange rate have a negative impact on China’s financial stability and are detrimental to the development of China’s financial stability,suggesting that maintaining a stable RMB exchange rate is beneficial to maintaining financial stability;finally,the theoretical and empirical results indicate that Finally,the theoretical and empirical results show that there is a linkage between the three,i.e.short-term international capital not only affects financial stability directly,but also may affect China’s financial stability by influencing the RMB exchange rate,while the RMB exchange rate also affects China’s financial stability directly or indirectly by influencing the movement of short-term international capital.Possible innovations of this paper are mainly reflected in the following.First,this paper summarizes the core framework of China’s financial stability report by referring to existing domestic and international research on the construction of a comprehensive financial stability index,and extends it to establish the China Financial Stability Index(CFSI)constructed in this paper,which contains three primary indicators,namely financial institutions,financial markets and macroeconomics,as well as 19 basic economic indicators,and by means of principal component analysis Each basic indicator is assigned a weight and synthesized into a quantitative indicator of China’s financial stability by means of principal component analysis.Secondly,most of the current studies on short-term international capital flows and financial stability start from the local impact of short-term international capital flows on financial stability,such as the study of short-term international capital flows on the stock market,money market,foreign exchange market and other local systems respectively.This paper adopts a combination of local and global approaches,not only studying the mechanism of the impact of short-term international capital flows on the stability of the local financial system,but also incorporating short-term international capital flows,exchange rates and financial stability into the same framework from a holistic perspective to study the impact of short-term international capital and exchange rate fluctuations on the overall stability of the financial system.Thirdly,there are few analyses and tests of the relationship between short-term international capital flows,exchange rate volatility and financial stability in the existing literature.This paper investigates the dynamic relationship between short-term international capital flows,RMB exchange rate volatility and financial stability in China through a complementary approach of theoretical and empirical analysis and validation,which plays a complementary role in the existing academic research. |
