External Imbalance,Financial Adjustment Channel And Financial Crisis

The cross-border asset mutual holdings have increased largely with the rapid advancement of global financial integration.The imbalance of the International Investment Position is becoming more and more obvious.The connotation of country’s external imbalance has extended from the Balance Of Payments to International Investment Position.Correspondingly,financial adjustment channel which beyond the traditional trade adjustment channel acquires much attention,and together with latter adjust the overall external imbalance of a country.This paper quantifies the importance of financial adjustment and trade adjustment channel to the adjustment of external imbalance based on the measurement of the external imbalance of major economies.After exploring the factors that affect the adjustment of financial channel on external imbalance,this article studies the non-linear effects of financial channel on external imbalance considering the structural changes generated within the economic system.Further focusing on International Investment Position allocation structure,this paper explores the possible channels of systemic financial risks and financial crises caused by structural imbalance in external position allocation from the perspective of financial adjustment and capital flow volatility transmission.Then,It makes profound thinking about financial crisis prevention and response.The main work and conclusions are as follows:Firstly,the estimation based on PVAR verifies that negative external imbalance below the trend level will require to be compensated by future growth in net exports or a higher return on net external assets expected in the future.The variance decomposition reveals that both financial channel and trade channel play an important role in the adjustment,which can explain about 46.23%and 53.77%of the dynamic changes in external imbalance respectively.It indicates that the relative importance of trade channel on the adjustment of external imbalance as revealed by traditional international economics has dropped significantly,while the relative contribution of financial adjustment channel to external imbalance has increased.Further considering the valuation gains and losses caused by unexpected risks,it shows that unexpected valuation losses accounted for a larger proportion,which means unexpected financial adjustment is more worthy of vigilance in the future.Secondly,starting from the path of financial adjustment channel,it makes profound thinking about the "incomplete financial market" hypothesis that explains the phenomenon of global imbalance,and proposes the institutional quality is the deep source of differences of financial adjustment on external imbalance.Considering structural changes caused by the level of institutional quality,this paper explores the threshold effect of financial adjustment on external imbalance based on institutional quality by using panel threshold regression model.The research shows that both financial adjustment channel and the subdivided exchange rate and asset price channels on external imbalance have threshold effect based on institutional quality.A basic fact is that the relatively high institutional quality of developed economies makes the adjustment effect of financial channel on external imbalance in a high range stage,which is difficult for financial channel to exert adjustment effects on external imbalance.While in developing countries,due to the relative low level of institutional quality,the adjustment effect of financial channel on external imbalance is "insufficient" As far as China is concerned,the overall quality of institutional environment has been significantly improved and consolidated in recent years.The adjustment of China’s external imbalance through financial channel is expected to operate effectively for a long time in the future.Thirdly,from the perspective of structural imbalance in International Investment Positions,this paper proposes that different asset-liability allocations affect financial vulnerabilities and induce financial crises through financial adjustments and asset fluctuations.It proves that equity liabilities represented by FDI,debt assets,and official reserves can reduce the probability of a country’s financial crisis significantly;while equity assets represented by OFDI and debt liabilities raise the probability of financial crisis.The positive effect of financial adjustment channel has weakened the role of OFDI in increasing the probability of financial crisis,which means that the adjustment of external wealth effects brought about by financial adjustment channel helps to resist systemic financial risk to a certain extent.Finally,this paper makes effective reflection on the prevention and response of the financial crisis.Following the logical thinking of the structural imbalance of external assets and liabilities—financial crisis—macroprudential policies,it discusses the application of macroprudential policies in the post-crisis era and their effectiveness in preventing financial crises.The study shows that bank capital adequacy ratio has become a standing policy in the use of macro-prudential tools in various countries after the global financial crisis,which indicates the supervision,early warning and risk prevention of bank risks still constitute the key content of policy authorities.At the same time,the loan-to-value ratio tool for borrowers has received increasing attention,and household lending is included as one of the objects that need to be focused on in the process of systemic financial risk prevention.Tightening macroprudential policies have decreased the probability of the country’s financial crisis effectively by suppressing credit expansion.The restraining effect of macro-prudential policies on financial crisis is different among various economies,and it is heterogeneous in different periods before and after the global financial crisis.This paper holds that the importance of financial adjustment channel in external imbalance has become increasing prominent.It is necessary and urgent to attach importance to the evaluation of global imbalance by financial channel.Effective use of financial adjustment channel to improve external imbalance and realize optimization of external wealth requires attention to the construction of institutional quality.Especially for developing countries,improving institutional environment provides a good opportunity for financial channels adjusting external imbalance effectively.On the other hand,focusing on optimizing the allocation structure of International Investment Position and starting to allocate high-yield equity assets with a certain scale will be required.At the same time,strengthening the monitoring,early warning and prevention of systemic financial crisis caused by the imbalance of external asset structure are also desirable measures.