Macroeconomic effects driven by the coordinated promotion of interest rate and exchange rate liberalization reform

XIAO Weiguo1 CHEN Yu1 ZHANG Chenran1

(1.Economics and Management School of Wuhan University)

【Abstract】This paper establishes a 4-sector dynamic stochastic general equilibrium (DSGE) model to test the output and inflation response driven by the coordinated promotion of interest rate and exchange rate liberalization reform when the domestic economy suffers from various shocks. The results show that when the domestic economy suffers from positive shocks of domestic interest rate and technology, a certain degree of regulation on interest rate and exchange rate will be helpful for the stabilization of economic growth and price level; when the domestic economy suffers from positive shocks of foreign interest rate and technology, accelerating the liberalization may offset the adverse impacts from the external shocks. When the domestic economy suffers from negative shocks of both foreign and domestic interest rate, promoting the growth and stabilizing the inflation can not be achieved in liberalization acceleration at the same time. Therefore, in order to ensure sound macroeconomic operation, Chinese government and monetary authority need to always pay close attention to the main shocks the economy faces, and promote flexibly interest rate and exchange rate liberalization reform according to the actual economic situation.

【Keywords】 Interest rate liberalization reform; exchange rate liberalization reform; dynamic stochastic general equilibrium model;

【DOI】

【Funds】 Major Project of the National Social Science Foundation (12&ZD046) General Project of National Social Science Foundation (14BJY187) Key Project of Philosophy and Social Sciences of Ministry of Education (12JZD029)

Download this article

(Translated by ZHONG Yehong)

    Footnote

    [1]. Due to limited space, market-clearing conditions, corresponding equations of foreign sectors and final loglinearization results are not listed, please contact with the author if you are interested in. [^Back]

    References

    Chen, K., Gong, L. The Journal of Quantitative & Technical Economics (数量经济技术经济研究), (8) (2006).

    Gu, L.& Xiao,H. Statistical Research (统计研究), (9) (2004).

    He,H. Studies of International Finance (国际金融研究), (8) (2008).

    Huang, Z. Economic Research Journal (经济研究), (3) (2011).

    Jin, Z. & Hong, H. Economic Research Journal (经济研究), (4) (2013).

    Mei, D. & Gong, L. Economic Research Journal (经济研究), (11) (2011).

    Tan, Q. & Chen, P. Management World (管理世界), (8) (2013).

    Wang, B. & Ma, W. The Journal of World Economy (世界经济), (6) (2014).

    Wang, J. The Journal of World Economy (世界经济), (3) (2010).

    Zhao, S. & Xie, X. Nankai Economic Studies (南开经济研究), (10) (2013).

    Beetsma,Roel M.,Ploeg Frederick Van,(1998)“Macroeconomic Stabilization and Intervention Policy Un\sder an Exchange Rate Band,”Journal of International Money and Finance 17(2), 339–353.

    Cespedes, L.,R.Chang and A. Velasco,(2004)“Balance Sheets and Exchange Rate Policy,”American Eco\snomic Review(94), 1183–1193.

    Feyzioglu,T.,N.Porter,E. Takats,(2009)“Interest Rate Liberalization in China,”IMF Working Papers (171).

    Funke, Paetz,(2012)“Financial System Reforms and China’s Monetary Policy Framework: A DSGE Based Assessment of Initiatives and Proposals,”BOFIT Disscussion Papers (30).

    Liu,P.,(2010)“Stabilization Bias for a Small Open Economy:The Case of New Zealand,”Journal o\sMacroeconomics 32(3), 921–935.

    Macdonald,R.,Nagayasu,J,(2004)“The Long-Run Relationship between Real Exchange Rates and Rea\sInterest Rate Differentials:A Panel Study”,IMF Staff Papers 47(1), 116–128.

    Nicoletta,B.,Pearlman,J.and Levine,P.,(2006)“Optimal Exchange Rate Stabilization in a Dollarized\sEconomy with Inflation Targets,”Computing in Economics and Finance 1, 99–112.

This Article

ISSN:1002-4670

CN: 11-1692/F

Vol , No. 08, Pages 156-167

August 2015

Downloads:0

Share
Article Outline

Abstract

  • 1 Introduction
  • 2 Model establishment
  • 3. Parameter calibration and Bayesian estimation
  • 4 Empirical results and analysis
  • 5 Conclusions and inspirations
  • Footnote

    References