Research On The Coordination Between Capital Account Opening And Exchange Rate Policy

Since the Reform and Opening-up,China’s economy has achieved rapid and stable growth for over 4 decades.Its achievements have attracted the attention of the world.Especial after joining the World Trade Organization in 2001,China has shown the world a more opening-up attitude,which has effectively promoted the development of global trade and cross-border capital flow,and continuously absorbed nutrients from it,realizing two decades of solid economic development.Meanwhile,with the intensification of foreign trade liberalization,the scale and speed of cross-border capital flow have increased rapidly.China’s real economy has suffered huge external shocks,and the choice of capital account management and exchange rate policy are facing severe challenges.The report of the People’s Bank of China(2012)pointed out that only through the coordinated promotion between the reform of the exchange rate system and the opening of the capital account can we reduce the shock of the financial system caused by the reform.However,how to coordinate and promote the reform of capital account and exchange rate formation mechanism,so as to avoid possible risks and ensure the healthy and high-quality development of China’s economy? This is the question that the economic circle needs to answer,and it is also the theme of this thesis.Centered on this theme,this thesis needs to study 3 questions step by step.First,what are the advantages and disadvantages of capital account opening to China’s economic growth?Does expanding capital account opening bring opportunities or crises to China? Second,after more than 20 years of exchange rate system reform,what is the evolution mechanism of RMB exchange rate marketization? How is its degree of marketization? And what is the relationship between capital account opening and exchange rate formation mechanism? Third,facing the complex and changeable international situation,how could the authority coordinate the effectiveness of capital account opening and exchange rate mechanism,and how to formulate macro policies that are conducive to domestic economic development and financial stability?Based on the above considerations,this thesis focuses on how capital account opening and RMB exchange rate policy affect the development and stability of domestic economy.First,starting from the initial conditions of capital account opening growth effect,this thesis explores the existence and specific role of capital account opening threshold effect under different conditions,and provides an analytical framework for the study of capital account opening path selection.Then,from the perspective of capital account opening,we explore the linkage mechanism of the impact of various factors on RMB exchange rate fluctuations,and clarify the function and implementation effect of the exchange rate formation mechanism.Finally,by studying the coordinated promotion of capital account opening and RMB exchange rate policy,we can enrich and improve the theoretical basis of macro-control under the condition of open economy.According to the research logic of ―literature review-theoretical modeling-empirical analysis-policy suggestions‖,this thesis combines theoretical analysis with specific practice,focuses on the coordinated promotion of capital account opening and exchange rate policy,and carries out a series of related research.As the opening chapter of the thesis,the introduction briefly expounds the research background,the origin of the theme,its theoretical value and practical significance,analyzes the research logic,writing ideas and main research methods of the thesis,summarizes the main content of the thesis,and lists the contribution and innovation of the thesis,while points out the existing shortcomings and future research direction.Then,this thesis reviews the existing literatureat home and abroad and combs the theoretical basis for the research.First of all,closely focusing on the issue of capital account opening,this thesis combs the relevant literatures,straightens out the development context of capital account opening and its relationship with economic growth and exchange rate policies.It summarizes the selection and transformation of a country’s exchange rate system.Based on the existing research,this thesis refines and evaluates the choice of exchange rate system and the effectiveness of monetary policy under the constraint of capital account management,and establishes the transmission path from capital opening to macro output,the dynamic adjustment of exchange rate formation mechanism and the framework of multi-dimensional macro policy coordination.Second,focusing on the economic growth effect of capital account opening,exchange rate decision,coordinated promotion of various policies and other topics,this thesis briefly expounds the relevant theories respectively and summaries the targets,conditions and paths for coordination of capital account opening and exchange rate policy as the theoretical framework.It not only makes full preparations in advance for clarifying the research ideas and the selection and reference of research methods,but also lays a solid theoretical foundation for subsequent chapters.For the three core issues to be studied in this thesis,firstly,this thesis analyzes the growth effect of capital account opening in order to clarify the specific effect of capital account opening.By combing,analyzing and studying the existing literature and relevant theories,it is concluded that under different development stages,a country might benefits from the opening of capital account in different ways.It analyzes the effects of capital account opening on economic growth by using linear model and panel threshold model respectively.According to the definition of the development stages of different countries by the United Nations and IMF,the model setting and research assumptions are integrated with each other,which confirms the relationship between objective reality and theoretical deduction,and tests the rationality of theoretical analysis from an empirical perspective.This thesis analyzes the threshold conditions of the economic growth effect of China’s capital account opening through transnational panel data and practical measurement methods,and calculates the corresponding threshold value,which points out the direction for China to make use of the initial threshold conditions of the positive effect of capital account opening;On this basis,it is proposed to continue to improve China’s institutional environment and improve the efficiency of market resource allocation;Continue to maintain a good external trade environment and realize the trade balance of internal and external circulation;We will improve the RMB exchange rate formation mechanism and maximize the growth dividends caused by the opening of the capital account.Secondly,aiming at the influence factors of exchange rate policies,this thesis analyzes the determination of exchange rate level under the condition of capital account opening,in order to determine the specific relationship between exchange rate policy and opening policy.In the empirical research,under the background of the continuous deepening of China’s financial market reform and the continuous improvement of the exchange rate formation mechanism,based on the extended Taylor rule,this thesis analyzes the core influencing factors of the RMB exchange rate by constructing the TVP-SV-BVAR model.With the ―8·11exchange rate reform‖ as the node,it compares the changes of various influencing factors before and after the exchange rate reform.The results show that capital account opening will promote the appreciation of RMB exchange rate in the short,medium and long term,and the short-term and medium-term effect is more significant.In the short term,the exchange rate expectation promotes the depreciation of the RMB exchange rate,and the medium and long-term role is gradually weakened.The effects of inflation spread and interest rate spread are similar on the whole,showing appreciation effect,and converging to purchasing power parity and interest rate parity in the long run.The impact of the output gap on the nominal exchange rate appears the overshoot phenomenon that the local currency devalues first and then rises in the short term,and the devaluation rate exceeds the increase rate.In view of this,this thesis puts forward corresponding policy suggestions: the monetary authorities should pay attention to the interaction between the influencing factors of the RMB exchange rate,reasonably arrange the capital account management policies,effectively guide the expectations of the foreign exchange market,and then ensure the stable operation of the macro-economy.Thirdly,in order to explore the effectiveness of coordinating capital account opening and exchange rate policy topromote domestic development under multiple policies,this thesis uses the extended Mundell Fleming Model and the five-sector DSGE model to analyze from two aspects.From the mutual influencing level,based on the traditional Mundell-Fleming model,this chapter constructs an expanded Mundell-Fleming model by introducing indicators such as capital account opening,global economic uncertainty and the combined-policies indicator.By deconstructing the mathematical relationship in the three curves of the expanded model,this chapter analyzes the logical relationship between various elements,and further expounds that under the background of increasing macroeconomic uncertainty,the synergy mechanism of RMB exchange rate fluctuation and capital account management on China’s economic development.Through the impact response results of TVP-SV-BVAR model,it is concluded that:(1)the enhancement of global economic uncertainty will inhibit China’s economic development through two channels;(2)the setting of the combined-policies indicator highlights the mutual spillover effect of the formulation and implementation of domestic and foreign policies.The final effects of different domestic and foreign policies will change under different circumstances;(3)capital account management and RMB exchange rate fluctuation have a synergistic effect on China’s economic development,and they also affect each other at the same time.At the moment of increasing global economic uncertainty,it is of great practical significance to coordinate,promote and improve capital account management policies and exchange rate policies.At specific coordination plan level,taking traditional open economy as an example,this chapter constructs a five-sector DSGE model under open economy condition,including capital control,financial friction,exchange rate system and macro prudential management,and analyzes the response changes of various macroeconomic indicators in the face of external shocks under different policy combinations and system quality conditions,Then it discusses the policy combination suitable for China’s basic national conditions and the feasible reform direction in the future.The results show that: firstly,China implements a managed floating exchange rate system.Compared with the strict capital control,the macroeconomic indicators perform better under the relaxed capital control.Further opening the capital account is conducive to the sustainable growth of China’s economy.Secondly,the managed floating exchange rate system allows the monetary authorities to take exchange rate intervention measures to ensure the stability of the exchange rate,which helps to reduce the uncertainty of economic development,so it is more suitable for China’s current stage of economic development.Moreover,the addition of macro prudential policies can not only ease the market sentiment when the economy is overheated,smooth inflation and exchange rate fluctuations,but also support the negative attitude of the overall market when the economy is down,so as to lay a foundation for stabilizing market expectations and reversing the trend.Finally,the improvement of the overall institutional environment will help to release the potential of market allocation of resources,reduce the friction in economic operation and promote domestic economic growth.Also,this thesis offered a suitable policy combination:―relatively high capital account openness + managed floating exchange rate + appropriate macro prudential policy‖.Finally,this thesis systematically analyzes and summarizes the research conclusions of the previous chapters,focuses on the relationship between the conclusions,reaffirms the logical structure of the thesis,and draws the overall conclusion of this study:(1)the growth effect of capital account opening largely depends on the initial conditions of one country,such as system quality and exchange rate level;(2)under the condition of open economy,the influencing factors of exchange rate share strong mutual impact effects;(3)under complex international situations,the synergy between capital account opening and exchange rate policy is becoming more and more important;(4)based on the requirements of deepening reform and opening up,in order to ensure the steady development of our country’s economy,the coordinated promotion of open policy,exchange rate policy and macro prudential policy is essential.On this basis,this thesis puts forward corresponding policy suggestions: First,in terms of capital account opening,we should deepen reform and expand opening-up;Second,in terms of exchange rate policy,we should pay attention to smooth exchange rate fluctuations and continue to promote market-oriented reform;Thirdly,in terms of macroeconomic regulation and control,we must accelerate the construction of the system and improve coordinated management;Fourth,comprehensively coordinate and promote the formulation and implementation of various policies,reduce the friction between various policies and ensure the stable operation of macro-economy.