Capital Account Openness?Exchange Rate Regime Reform And Macroeconomic Fluctuation

The opening of capital account and the choice of exchange rate system are the most important two policy arrangements in the open economy.The coordination of the two policies jointly affects the macroeconomic fluctuation of China under the external shocks.At present,China's capital market is still under strict control,and the degree of opening capital account is still relatively low.At the same time,China's current exchange rate system still emphasizes the active intervention of the government,the market mechanism is not perfect,and the flexibility of RMB exchange rate free floating is also relatively low.With the continuous development of economic globalization,the opening of capital account and the free floating of RMB exchange rate will be the trend of the times,and will also be the long-term policy target of the Chinese government.Under the circumstances of long-term policy arrangement,how to rationally plan the short-term policy arrangement at the present stage to minimize the short-term economic fluctuation is the key to the long-term policy goal.In the short term,whether we should speed up the opening of capital account and further improve the flexibility of RMB exchange rate free floating,there are great policy uncertainties in the complex external environment.Blindly accelerating the process of capital account liberalization and exchange rate free floating may increase the risk of macroeconomic fluctuations.Therefore,at present,we should take a prudent attitude towards capital account liberalization and exchange rate system reform,and comprehensively consider the impact of different types of potential shock risk on the policy effect.In order to further explore the effects on macroeconomic stability through liberating capital controls and exchange rate intervention,and how to make gradual reform,to better cope with economic fluctuations caused by different exogenous shocks,this paper based on a two-country DSGE model,construct four kinds of different degree of regulation policy combination,and use the impulse response analysis to dynamically simulate the difference of economic fluctuation among different policys.Finally,according to the optimal policy of economic fluctuation minimization setting,give a reasonable direction of policy reform.It is necessary to note that this paper mainly studies the bond capital,so the capital account contains only the government bonds of the two countries,without regard to other financial capital such as stocks.In the government policy,we design four kinds of policy combination with different degree of regulation,they are "capital account control +limited floating exchange rate system" and "capital account openness + limited floating exchange rate system","capital account control + free floating exchange rate system" and "capital account openness + free floating exchange rate system".In order to match the Chinese government's strong intervention in the capital market and the foreign exchange market at present,the government's benchmark policy portfolio is set as "capital account control + limited floating exchange rate system".In addition,by changing the bond adjustment costs and steady state of the domestic government debt ratio faced by households,to distinguish "capital account control"and "capital account openness";by setting its monetary policy with different degree of intervention on the nominal exchange rate fluctuations,to distinguish "limited floating exchange rate system" and "free floating exchange rate system".According to the real economic environment,this paper assumes that foreign governments always implement the policy arrangement of capital account openness and free floating exchange rate system.The logic structure of this dissertation is as follows:Firstly,establish a two-country DSGE model of the new Keynes condition;Secondly,in the benchmark policy combination of "capital account control+ limited floating exchange rate system",through multiple impact simulation,to test the applicability of the theoretical model;Next,conduct variance decomposition,and identify the the important source of exogenous shocks;Finally,according to the results of variance decomposition,under three important exogenous shocks,stimulate the difference between domestic economic fluctuations,and according to the principle of minimizing the fluctuation,choose the best policy arrangements,and give a reasonable direction of policy reform.The main conclusions of this paper are as follows:in the face of different types of exogenous shocks,There are big differences in the effects of liberating capital account control and exchange rate intervention,and the best policy that minimizes economic fluctuations is also different.(1)When facing the impact of domestic technology,adopt "capital account openness + free floating exchange rate system",the economic fluctuation is the smallest.(2)When facing the shock of nominal interest rate in China,adopt "capital account opening + limited floating exchange rate system ",the economic fluctuation is the smallest.(3)When facing the impact of nominal interest rate in foreign countries,adopt "capital account control + free floating exchange rate system",the economic fluctuation is the smallest.Based on the three points above,this paper argues that whether liberating capital account control and exchange rate intervention is conducive to macroeconomic stability,there are great uncertainties under different exogenous shocks.But in China's current economic environment,domestic technology shocks are still the main sources of exogenous shocks in the short term.As the largest developing country,China is now experiencing great changes in the production technology,and is highly vulnerable to technology shocks coming from the supply side,capital account deregulation and further improving the flexibility of RMB exchange rate free floating,is conducive to better respond to the impact of domestic technology shocks,and to enhance macroeconomic stability.It is the right direction of the policy reform at this stage.But we should also guard against the shock of nominal interest rates both at home and abroad and,if necessary,intervene in the foreign exchange market and in the capital market to reduce the economic fluctuations caused by the nominal interest rate shocks.