Research On The Impact Of Cross-border Capital Flows On Financial Stability

As the bridge of global financial connections,cross-border capital flows can alleviate domestic financing constraints,improve the productivity of resource allocation,and contribute to a "dual circulation" development pattern.At the same time,large-scale cross-border capital inflow and outflow will amplify the vulnerability and volatility of the financial system,and may also aggravate the contagion of risks between economies,which has a potential impact on domestic financial stability.As the degree of financial openness continues to expand,cross-border capital flows may impact the domestic financial system from multiple dimensions.Especially the complex external environment is more likely to cause cross-border capital flows shocks,which poses new challenges to financial supervision.The "14th Five-Year Plan" points out that we should "improve the management framework of cross-border capital flows and improve the capacity for risk prevention under open conditions".In this context,it is necessary to clarify the impact mechanism of crossborder capital flows on financial stability.How to deal with the impact of large-scale cross-border capital flows is also one of the key concerns of the policy authorities.In view of this,this paper closely focuses on the core variable of cross-border capital flows.Based on the uniqueness and difference of key components of the financial system,this paper first summarizes the theoretical evolution and literature review,then analyzes the characteristics of comovement of cross-border capital flows,and then analyzes the impact of cross-border capital flows on financial stability in multiple dimensions,and finally investigates the effectiveness of crossborder capital flow management measures.The main research contents,methods and conclusions of each chapter are as follows:Combined with the volatile international economic environment,and the deeply changing domestic economic situation,based on the requirements of the times to maintain financial stability,firstly,chapter 1 summarizes the background and significance of the topic of this research.Secondly,after careful deliberation,the research framework of the text is introduced and the main contents of the paper are described.Finally,the research methods and possible innovations of this paper are summarized.Chapter 2 explains the concept and connotation of cross-border capital flows and financial stability on the basis of reviewing relevant literature.Then this article introduces the core content of classical theories such as the financial instability hypothesis,the currency crisis theory,“Trilemma”,“Dilemma” and the global financial cycle theory,and expounds the regulatory mechanism of macro-prudential policy and capital control on cross-border capital flows.At the same time,the research progress and development status of relevant issues are clarified,which provides a theoretical basis for the empirical analysis in the following.Based on the global financial cycle theory,chapter 3 of this paper uses a multi-level dynamic factor model with time-varying parameters and stochastic volatility to capture the global and regional co-movement characteristics of capital flows,and analyzes the sources of fluctuations of cross-border capital flows.The study finds that cross-border capital flows show significant global and regional co-movement characteristics,and global and regional co-fluctuations dominate China’s capital flows.What’s more,the degree of explanation of cross-border capital flows by global common factors,regional common factors and national special factors is time-varying.Further,the research on how to alleviate the external sensitivity of cross-border capital flows finds that,the improvement of structural factors can weaken the external sensitivity of cross-border capital flows more than cyclical factors.The conclusion of this chapter shows that China’s cross-border capital flows are vulnerable to external shocks.Therefore,in the face of the current complex and volatile international economic environment,it is need to concern the potential impact of cross-border capital flows and analyze its possible adverse impact on financial stability.Chapters 4 to 6 are multi-dimensional analyses of the impact of cross-border capital flows on financial stability.Considering the heterogeneity and uniqueness of various components of the financial system,this paper selects the foreign exchange market,the stock market,and the banking sector as typical representatives of the components of the financial system,and conducts quantitative tests on how cross-border capital flows affect the stability of the foreign exchange market,the stock market,and the banking sector in turn.Chapter 4 explores the impact of cross-border capital flows on the stability of foreign exchange market from the perspective of foreign exchange market pressure.On the basis of expounding the influence mechanism of different types of cross-border capital flows on the foreign exchange market pressure,this paper constructs a NARDL model to reveal the long-term and short-term effects of cross-border capital flows on the foreign exchange market pressure from both the overall and the structure levels,and analyzes the asymmetric impact of the positive and negative impacts of crossborder capital flows.The study finds that,from the perspective of total volume,the expansion of cross-border capital inflows will bring appreciation pressure to foreign exchange market in the short and long term,and the expansion of cross-border capital outflows will bring depreciation pressure in the short term.In addition,the impact coefficient of the expansion and contraction of cross-border capital flows has significant asymmetric characteristics.From the perspective of structure,the appreciation pressure caused by the expansion of portfolio investment inflows is the most significant,while the depreciation pressure caused by the withdrawal of direct investment is the largest in the long term.But the impact of various cross-border capital outflows on foreign exchange market is mainly reflected in the short term.Further analysis shows that the reform of exchange rate marketization and macro-prudential policy can decrease the impact of various cross-border capital inflows on the foreign exchange market.Chapter 5 explores the impact of cross-border capital flows on the stability of stock market from the dual perspectives of stock market volatility and stock market imported risk.Firstly,this paper illustrates the influence channel of cross-border capital flows on stock market volatility and the theoretical basis of cross-border capital flows on the imported risk of stock market.Secondly,with the help of the quantile Granger causality test and the QVAR model,this paper discusses the impact mechanism of cross-border capital flows on stock market volatility under different volatility conditions.The results show that cross-border capital inflows help to stabilize the stock market in the period of extreme volatility,while in other conditions,they will aggravate the volatility of the stock market.Cross-border capital outflows can help to mitigate the risk of stock market volatility in the calm period of the market,while in other periods,they can amplify the volatility of the stock market.Finally,the dynamic spillover index method based on TVP-VAR model is used to measure the imported risk of China’s stock market.On this basis,quantile regression is used to characterize the nonlinear effect of capital flows on the imported risk of the stock market in the whole conditional distribution.The results show that both the divestment of capital inflow and the increase of capital outflow will aggravate the imported risk of the stock market,and the marginal effects of inflow and outflow have nonlinear characteristics under different imported risk levels.This chapter also finds that tightening the macro-prudential policy and increasing the flexibility of exchange rate can alleviate the strengthening effect of foreign capital withdrawal and capital outflow on import risk.Chapter 6 clarifies the impact of international capital flows on bank stability from the perspective of bank risk-taking.This paper constructs a theoretical model to analyze how crossborder capital flows affect the risk-taking of banks and the regulatory mechanism of macroprudential policies.Then,based on the PSTR model,we examine the nonlinear effect of capital flows on bank risk-taking from the perspective of micro individuals.The study finds that capital inflows will promote banks’ risk-taking behavior,and this promotion will gradually weaken as the capital adequacy ratio exceeds the threshold.However,cross-border capital outflows have an inhibitory effect on bank risk-taking,which will be strengthened as the capital adequacy ratio exceeds the threshold.Further we use SVAR model and counterfactual analysis to test the dynamic effect of capital flows on bank risk taking from the holistic perspective of banking industry.The results show that capital inflows will boost the risk-taking level of the banking industry,while crossborder capital outflows will weaken the risk-taking motivation of the banking industry,but the above effects are only significant in the short term.In addition,macro-prudential supervision can not only weaken the level of risk taking in the banking industry,but also effectively curb the excessive risk-taking of individual banks.Chapter 7 examines the effectiveness of cross-border capital flow management to explore how to deal with cross-border capital flow shocks.Firstly,this paper reviews and summarizes the management framework of international capital flows of international organizations and China’s regulatory practices.Secondly,based on Qual VAR model,this article describes the potential policy tendency of macro-prudential policy of cross-border capital flows.Finally,after controlling the reverse causal relationship,the spillover effect of foreign policies and the leakage effect of domestic policies,a smooth local projection model is constructed to test the effectiveness of macro-prudential policies of capital flows and capital control.The study finds that the macro-prudential policy of cross-border capital flows and capital control can effectively counter-cyclically adjust the level of capital flows and alleviate the potential pressure of extreme capital flows.Comparing the regulatory effects of the two,in terms of policy duration,the duration of macro-prudential policy is longer than that of capital control.In terms of policy transmission speed,capital control has a shorter time lag in regulating the scale of capital flows.Through comprehensive comparison,it is found that the macro-prudential policy of cross-border capital flows has a better regulatory effect.This paper systematically analyzes how cross-border capital flows affect financial stability from multiple dimensions.The research results show that cross-border capital flows have negative impacts on the stability of foreign exchange market,stock market and banking sector,respectively,through aggravating foreign exchange market pressure,amplifying stock market volatility and stock market imported risks,and acting on bank risk-taking,thereby affecting the stability of the financial system.In view of this,it is still necessary to pay attention to the potential effects of cross-border capital flows on financial stability,and strengthen macro-prudential supervision of cross-border capital flows to prevent various risks that may arise from cross-border capital flows,and effectively maintain financial stability.