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ID:
099911
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2010.
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| Summary/Abstract |
This paper investigates the link between hot money and business cycle volatility in China from January 1997 to December 2009. Using the structural vector error correction model, we find a considerable degree of long-run cointegration and bidirectional causality effects between hot money and business cycle volatility. The speculative shocks are found to temporarily promote China's economic growth, but also to exacerbate business cycle volatility. The liquidity shock stemming from hot money is shown to be the primary factor responsible for the significantly enhanced fluctuation in business cycles during the most recent global financial crisis period. This could be detrimental to the smooth operation of financial markets. Therefore, in forming future policies, it is critical for policy-makers to take precautions against the speculative factors.
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| 2 |
ID:
077186
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| Publication |
2007.
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| Summary/Abstract |
Despite a series of revaluations, which started in July 2005, hot money has been sporadically sneaking into China in anticipation of further revaluations of the renminbi. In this paper we build a monetary model to show how anticipated revaluations lead to the instability of a pegged exchange rate regime. This model assumes current account convertibility and some degree of capital control, and fundamentally sound domestic policies and economy, as is the case in China. The model demonstrates that market-oriented interest rates can act as an automatic stabilizer to ease revaluation pressures, but cannot resolve them completely because the nominal interest rate has a zero nominal bound. Therefore, the official parity is difficult to defend and the revaluation expectations can be self-fulfilling, in the absence of external intervention. The empirical results of Granger causality tests are consistent with the main findings of our theoretical model. There are a number of policy intervention measures that can extend the life of a pegged exchange rate regime
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| 3 |
ID:
077035
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| 4 |
ID:
054141
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