The Impact Of Short-term Capital Flow On Financial Stability

Since 1990s,short-term international capital flows has developed rapidly and boasted the main force of international capital flow.Normally,short-term international capital was periodically exposing,meanwhile,probably companying with financial crisis.Short-term international capital flow with strong volatility,large capital scale-changing and easy flow direction reversing,presumably trigger significant negative impact on financial system stability,mostly,being seen as the initiator of financial crisis.Nevertheless it has proved historically that the influence of short-term international capital flow was closely related to the level of financial development,so the degree of influences was different for countries.Comparing with countries on low level of financial development,those on high level have more power to cope with negative impact aroused by short-term international capital flows and even benefit from it.Tough,the breakout of the US sub-prime crisis in 2007 initiated our reconsidering.There might be a boundary for financial development.At the time the level of financial development attains a certain critical point,rapid development of financial institutions could lead to financial turmoil.At the same time,the theory of endogenous financial development believes that a country's financial development not only affects the economic growth,but also is influenced by international capital flow in the process of capital account liberalization.Therefore,dynamic financial development is the key factor to dynamically impact on the relationship between short-term international capital flow and financial stability.It has a founding meaning that it accurately depicts the path of financial development influence on the relationship between short-term international capital and financial stability,which is important to determine the sequence and speed of capital account liberalization and the policy of short-term international capital flow.This paper stresses emphasis on the topic of short-term international capital flows and financial stability.Based on financial development threshold,it contributes to analyze five core problems:what is the mechanism of financial development impact on relationship between short-term international capital flows and financial stability?On different level of financial development,how is the differential effect on influence of short-term international capital flow to financial stability?Is there any micro foundation support?Does it have a differential path of the short-term international capital flow affecting financial stability in the condition of dynamic financial development?Does china have any condition for further opening up of the short-term capital account in the current level of China's financial development?This paper consequently first carries on the review to the relevant research literature,in view of the three key concepts in this paper(short-term international capital,financial development and financial stability)still being controversial,it devotes to have these three concepts summarized,and put forward the definition of them in the paper,also analyze the impact of short-term international capital flows on financial stability;financial development influential effects on the relationship between short-term international capital flows and financial stability and other underlying influential factors.Secondly,the paper analyzes the impact mechanism of financial development on relationship between short-term international capital flows and financial stability.Financial development influents certain intermediate variables including the expansion of credit,monetary policy and asset price volatility and macroeconomic stability,which thereby affects that relationship.Based on expanding of Broner and Ventura(2010)debt crisis model,from the financial development stimulation to the formation of production capital,the paper establishes the theoretical model of short-term international capital flow impact on financial stability considering static financial development threshold,and get the conclusion that the influence of short-term international capital flow on financial stability could be changed from negative to positive if and only if the financial development level reaches a certain threshold value.Combined with the "dynamic" characteristics of financial development in the angle of influential function of household consumption and savings,the paper analyzes the micro mechanism of dynamic financial development,which concludes that only when a country's initial level of financial development reaching a certain point,the short-term effect of international capital flow on financial stability could change from negative to positive in a perspective of dynamic financial development.The analysis of mathematical model still requires further empirical test.First of all,through the static panel data of 36 countries including China and dynamic panel data of the theoretical model,the paper makes an empirical test on effecting of short-term international capital flows on financial stability based on the consideration of financial development threshold.It shows that,by breakthrough of the theoretical analyzing limitations,the relationship between the short-term international capital flows and financial stability in the different static levels of financial development presents in a shape of inverted "U",indicating two thresholds;Then,by scale measurement of short-term international flow in china,the paper puts dynamic impact of short-term international capital flows to financial stability with the unconstrained VAR model,and reaches a viewpoint that the relationship between the short-term international capital flows and financial stability in the different dynamic levels of financial development presents in the same shape of inverted "U".Finally,the paper conclusively states,by above-mentioned empirical testing and china's current situation analysis,that the country should first establish a round measuring database to provide accurate information for financial development level,and secondly promote the level of domestic financial development in the premise of financial stability,enhancing catalytic role of production capital.Thirdly,Chinese government could open up short-term capital account liberalization by steps with the order of bond investment,other investment accounts,and stock investment accounts considering different financial development thresholds faced by different types of' short-term international capital flows.Fourly,it should further strengthen the monitoring of the implicit short-term international capital flows,although which still has little negatively impact on financial stability in China.Finally,other effective cooperation,such as implementation of macro prudential supervision and strongthening of the system construction,are also necessary for effectively management of the short-term international capital flows in China.