Fed in Print

Abstract

China maintains tight controls over its capital account. Its prevailing regime also features financial repression, under which banks are often required to extend a fraction of funds to state-owned enterprises (SOEs) at below-market interest rates. We incorporate these features into a general equilibrium model. We find that capital account liberalization under financial repression incurs a tradeoff between aggregate productivity and intertemporal allocative efficiency. Along a transition path with a declining SOE share, the second-best policy calls for a rapid removal of financial repression, but gradual liberalization of the capital account.

Zheng Liu & Mark M. Spiegel & Jingyi Zhang, Optimal Capital Account Liberalization in China, Federal Reserve Bank of San Francisco, Working Paper Series 2018-10, 02 Aug 2018.

JEL Classification:

F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

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