2018-10 | August 2018
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Optimal Capital Account Liberalization in China
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.
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Liu, Zheng, Mark M. Spiegel, and Jingyi Zhang. 2018. "Optimal Capital Account Liberalization in China," Federal Reserve Bank of San Francisco Working Paper 2018-10. Available at https://doi.org/10.24148/wp2018-10