The Two-pillar Regulatory Effects Under Open Conditions: A Cross-Country Empirical Study
MA Yong, GUO Rui, ZHANG Hongming
School of Finance/China Financial Policy Research Center, Renmin University of China; Institute of Chinese Finance Studies, Southwest University of Finance and Economics
Summary:
Since the 18th National Congress of the Communist Party of China (CPC), significant progress has been made in deepening financial supply-side structural reforms and institutional financial openness. However, the Western world has intensified frictions in global economic and financial activities by imposing unreasonable tariffs, implementing baseless sanctions, and controlling financial institutions' actions. This has led to a deterioration of the global economic and financial situation, presenting new challenges to China's economic and financial openness. Against this background, on May 14,2020, the Politburo Standing Committee of the CPC Central Committee proposed “to build a new development pattern where domestic and international dual circulations promote each other”, and the 20th National Congress of the CPC emphasized “advancing high-level opening-up”. These developments pose higher demands on current macroeconomic policies, which need to better balance the relationship between economic openness, financial openness, and economic and financial risks. The two-pillar policy, as one of the most important tools in macroeconomic control, plays a crucial role in balancing economic openness, financial openness, and economic and financial risks. Therefore, it is necessary to systematically study the regulatory effects of economic openness, financial openness, and two-pillar policies. While the effectiveness of two-pillar policies has been validated theoretically and supported empirically in some literature, existing studies have not fully discussed the impact of economic and financial openness on the regulatory effects of two-pillar policies, especially from an empirical standpoint. In light of this, this paper conducts an empirical analysis based on panel data from 95 economies from 1990 to 2020, examining the impact of economic and financial openness on the regulatory effects of two-pillar policies and discussing the coordination issues among economic openness, financial openness, and two-pillar policies. The analysis shows that, on the one hand, from the perspective of primary effects, two-pillar policies do play a countercyclical regulatory role in stabilizing output, prices, credit, and asset prices, thereby promoting the joint stability of the economic and financial systems. On the other hand, from the perspective of moderating effects, as the levels of economic and financial openness increase, the regulatory effects of two-pillar policies tend to decline under various conditions. Further analysis indicates that at moderate levels of openness, two-pillar policies can achieve joint economic and financial stability through appropriate adjustments in policy intensity; however, at higher levels of openness, macroprudential policies face stronger negative moderating effects, suggesting that with increasing economic and financial openness, macroprudential policies may require relatively greater implementation intensity to achieve financial stability. The policy implications of the conclusions of this paper are as follows. Firstly, there is a need to focus on the coordination among economic openness, financial openness, and two-pillar policies. The goal of coordination is economic stability, providing a solid foundation for integrating these elements. Secondly, financial openness should aim for high-level rather than large-scale openness. Policy authorities should always ensure that financial openness is predicated on a stable domestic macro environment and aimed at high-quality development of the domestic economy. This not only involves setting thresholds and pacing for foreign capital entry into China and identifying foreign institutions willing to participate long-term in China's economic and financial development but also involves creating more durable institutional openness to attract proactive foreign institutions. Finally, by further refining the two-pillar framework, the regulatory effectiveness of two-pillar policies can be enhanced. Specifically, enhancing the primary effects and weakening the moderating effects of these policies can expand the coordination space between economic openness, financial openness, and two-pillar policies. As openness increases, authorities should consider establishing corresponding risk monitoring systems and actively expanding the two-pillar policy toolkit to develop targeted policy tools based on potential risk transmission mechanisms, thereby effectively identifying and blocking key nodes of risk transmission and enhancing the overall regulatory effect of policies.
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