A Dynamic Study Of The Effectiveness Of Chinese Capital Controls

Although scholars and politicians always have a debate on whether it is useful to carry out capital controls policies,during the last two decades,the truth that higher level of capital liberalization means higher risks of free movement of international capital flows for emerging economies and financial crises burst out frequently has made the importance of capital controls come into people's notice.On October 1,2016,International Monetary Fund(IMF)announced Chinese renminbi(RMB)has been included in the new Special Drawing Right(SDR)valuation basket,which meant China is experiencing a vital period of boosting capital account liberalization.In this progress,facing rapidly changing environment,capital control still has its important roles in maintaining stability of Chinese economy and financial system.Under the circumstances,the study of the effectiveness of Chinese capital control is meaningful.For the time being,most of Chinese scholars uses the relationship between several macroeconomic variables to reflect the effectiveness of capital controls and draw out a consistent conclusion that Chinese capital controls only have its effect during a short period.But on one hand,these kind of methods omitted other important factors which can affect the relationships between two macroeconomic variables,on the other hand they cannot distinct the effectiveness of capital inflow controls and capital outflow controls.This paper intend to set two categories,capital inflow and capital outflow,and build capital control indexes separately,then find out in the two categories how effective capital control measures affect several policy goals.This paper first builds a more detail Chinese capital inflow control Index and capital outflow control index.Then it selects real output,real interest rate differential,real exchange rate,capital flows including capital inflows and capital outflows,capital restriction index including capital inflow restriction index and capital outflow restriction index,within two periods of first quarter of 1998 to second quarter of 2005 and third quarter of 2005 to forth quarter of 2015.This paper uses VAR model and impulse response function to analyze the effectiveness to different policy goals of Chinese capital inflow restrictions and outflow restrictions respectively.The outcome shows that during the period after 2005Q3 Chinese capital restrictions are less effective than the period before 2005Q2,especially in the control of capital outflows and the target of maintaining the stability of exchange rate.At the end of the paper,several suggestions are given.