Short-term Capital,Monetary Policy and Financial Stability
LI Li, WANG Bo, LIU Xiaoxiao ,HAO Dapeng
Guanghua School of Management,Peking University;
School of Finance,Nankai University;
Hanqing Advanced Institute of Economics and Finance,Renmin University of China
Abstract:
We built a new Keynesian DSGE model with the short-term capital flows and tested China’s monetary policy reaction functions from 1994Q1-2015Q4 empirically and found that: with the liberalization of RMB capital account, the impact of short-term capital flows on the stability of China’s macroeconomic and financial systems will be fiercer. Monetary policy rule should consider the effect of short-term capital flows to stabilize the domestic economic fluctuations. We also found the modified monetary policy rule with short-term capital flows can better fit the trace of our interest rate operation in history. Then we established the MS-VAR model, the results showed that: the liquidity of short-term capital flows have obviously changed and can be divided into two regimes. In the high liquidity regime, short-term capital outflows will bring more intense and sustained contraction effect on the ecomomy. Therefore, our monetary policy should pay close attention to the capital flows to improve the macro-prudential regulation framework and stabilize the financial systems.
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