Capital Controls, Technology Shocks And Optimal Monetary Policy

With China’s reform and opening up, as well as the rapid economic development in recent years, China has become the world’s second largest economy, but also the world’s largest developing countries or emerging market countries, China’s role in the world economy and the impact has not been ignored. On the one hand, the development of economic globalization has brought about a historic opportunity for development, but also brings unprecedented challenges. With the deepening of the degree of trade openness and economic development, foreign economic fluctuations and foreign monetary policy rules have become an important factor for the Chinese monetary authorities to consider. In 2008, the financial crisis started in the United States, so that the world’s economies realized that in deepening economic and trade cooperation, while taking into account the spillover effect of foreign monetary policy has become an unavoidable issue. As the world’s first and second largest economies, the United States and the United States as the most valuable economic partners, and they are the most valuable economic partners, to study the monetary policy transmission mechanism of the two economies, and discuss the impact of monetary policy on foreign economies and optimal monetary policy coordination will have important practical significance. At the same time, in order to make the capital flow to play a useful role, to avoid the risk of capital flows, China’s capital to take capital control policy. The effect of capital control policy is widely discussed in the academic circle. Generally speaking, the study on capital control in foreign countries concludes that the capital regulation policy will destroy the freedom of the market, thus causing the loss of benefits. And some scholars, such as Prasad (2005) believe that due to China’s financial system is not yet fully, fully liberalized capital account will give China a major risk, therefore, appropriate capital controls are necessary for china. Domestic researches on capital control are more concentrated in empirical studies, this paper attempts to analyze the validity of capital control and the optimal monetary policy in the open economy model of the two countries.Study on international coordination problems of macroeconomic policy, the earliest can be traced back to the 20th century 1950s British economist Meade put forward under the condition of open economy policy mix thought, namely "Meade’s conflict. Then more famous for the formation of the 1950s Mundell Fleming model, in the subsequent economics of Mundell Fleming model for a more in-depth and realistic supplement. Hamada (1976) analysis of the necessity and benefits of international monetary policy coordination by using game theory, and created the first international monetary policy coordination model. In 1990s, Obstfeld and Rogoff (1995) established a dynamic general equilibrium model, which is based on the open economy, which has the micro foundation, the monopoly competition and the rational expectation. Since then opened up a new field of macroeconomics research of open economy, created "New Open Economy Macroeconomics (NOEM)". A dynamic general equilibrium analysis method is adopted in the new open macroeconomics framework. The price stickiness and the imperfect competition are incorporated into the model, and the utility model is the objective function, and the international transfer mechanism of macroeconomic policy is investigated. The new open economy macroeconomics (NOEM) provides a more scientific theoretical framework for the exchange rate fluctuations and the transmission mechanism, the inflation generation mechanism and the existence of friction and other issues of the capital market.In this paper, we try to describe the effectiveness of capital control policies by using the dynamic stochastic general equilibrium model of the open economy in China, and the concrete way of monetary policy transmission in the capital control, and finally to the optimal monetary policy. After the establishment of a dynamic stochastic general equilibrium model with capital controls, some important parameters and their influence on the monetary policy transmission mechanism are analyzed. Through theoretical model and simulation analysis, this paper draws the following conclusions:First, capital controls in response to the impact of foreign technology is obvious. Through comparative analysis of domestic and foreign technology shocks and the impulse response of the domestic and foreign endogenous parameters, capital control in response to foreign technical impact is very significant.Second, when the monetary authorities to adopt the interest rate rules, capital controls in response to foreign technology shocks to obtain the benefits of different benefits. Through comparative analysis of different interest rate rules, capital controls and non capital controls respond to the economic variables in the domestic and foreign technology shocks. But under the two interest rate rules, capital controls are different from the welfare gains that they receive from the impact of foreign technology, which is based on the price of domestic product (PPI), which is higher than the interest rate (CPI).Third, the formulation of the optimal monetary policy depends on the stability of the monetary authorities. If the national monetary authorities concerned about the stability of their product prices (PPI), then based on the national product price (PPI), the inflation rate is significantly better than the national price (CPI) of the interest rate rules, and the benefits are significant. If national monetary authorities are concerned about the stability of CPI, then the interest rate based on (CPI) is superior to that of the national product price (PPI), but the benefits are not obvious.Fourth, the opening degree will increase the impact of external shocks on the economy of the country. In this paper, we find that the sensitivity of the analysts, when the degree of openness, the endogenous economic variables in the face of external shocks, volatility has increased. In addition, optimal monetary policy, when the opening degree increases, based on their PPI of the interest rate rule is still based on interest rate rules of domestic CPI is better.Fifth, there is a moderate value of capital control. Capital controls are not in the sensitivity analysis that capital controls are not in any circumstances, but there is an appropriate value, which is related to the degree of openness. When capital controls are stricter, more than that, capital controls will bring benefits to the external shocks, and when capital controls are lower, that is, capital controls will receive benefits from external shocks. And the determination of the appropriate value and the degree of openness of the country concerned. This is an important revelation to the monetary authorities, capital controls in response to external technology shocks are not in any case can get benefits, excessive capital controls but to bring welfare losses.