Capital Controls、External Shocks And The Exchange Rate Regime Choice Of China

This paper constructs a small open economy with capital control and financial friction in the new open macroeconomics frame,which provides a theoretical explanation for the choice of China’s exchange rate system.The small open economic model consists of three sectors:family,financial intermediation,and firm.There are particular close links between the sectors.The family sector,which provides the labor to the financial intermediae sector obtaining wage,and provides the money to financial intermediate sector acquiring interest on deposit;The financial intermediate sector loans fund to the firm sector gaining interest on loan above the deposit interest;The firm sector uses working capital producing goods and provides to the family sector.So,the product markets,labor markets,financial markets have reached a state of clearance.Thus,when an external shock is transmitted to one of the domestic sectors of the economy,the other two sectors of the economy will make economic fluctuations,and then bringing the economy to a new equilibrium level.We can see that the choice of exchange rate system has been the research focus of macroeconomic theory,so it is a question worth exploring.In addition,the exchange rate issue has become an important factor that causes the economic fluctuation in the process of our country’s economic openness rising.Therefore,the main problems to be studied as follow:First,what is the factor that causes the change of the optimal exchange rate system?Second,what makes the choice of the exchange rate system generating "exchange rate system polarization" phenomenon?Third,when China’s economy at different stages of development,what is most appropriate choice of exchange rate regime?By introducing capital controls and financial friction in a small open economy model,this paper studies the optimal exchange rate regime choice when the monetary and monetary policies adopted by foreign monetary authorities are interest rate rules or tough anti-inflation,and they suffer from foreign demand shocks or domestic technological shocks,we can acquires the results as follows:(1)When a small open economy suffers a shock from foreign demand,whether the monetary policy adopted by the foreign monetary authorities is an interest rate rule or a hard-fought anti-currency policy,the optimal exchange rate regime are the floating exchange rate regime of building a basic domestic economic model.(2)When a small open economy suffers domestic technology shock,whether the monetary policy adopted by the foreign monetary authorities is the interest rate rule or the tough anti-inflation,the optimal exchange rate system selection are the intermediate exchange rate system for a domestic economic model including the capital control and financial friction.(3)The external shocks are the main factors influencing the choice of the optimal exchange rate system,regardless of the monetary policy adopted by the foreign monetary authorities.When the monetary policy adopted by the foreign monetary authorities is hard-fought anti-currency policy,the financial friction also changes the domestic optimal exchange rate System choice.(4)Regardless of monetary policy adopted by foreign monetary authorities,external shocks are the main factors leading to the polarization of exchange rate system.When the monetary policy adopted by foreign monetary authorities is hard-fought anti-currency policy,the degree of domestic capital control also generating exchange rate regime polarization.(5)At present,China’s economic operation is mainly affected by the impact of domestic technology,so the monetary authorities at the present stage of the exchange rate system(intermediate exchange rate system)is appropriate.(6)As China’s economic development level and R&D level continue to increase,the future of China will be mainly affected by the impact of foreign demand shocks,so the monetary authorities in the next stage of economic development using floating exchange rate system is the optimal choice.