2018-10 | May 2020
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Optimal Capital Account Liberalization in China
China maintains tight controls over its capital account. Its current policy regime also features financial repression, under which banks are required to extend funds to state-owned enterprises (SOEs) at favorable terms, despite their lower productivity than private firms on average. We incorporate these features into a general equilibrium model. Our model illustrates a tradeoff between aggregate productivity and inter-temporal allocative efficiency from capital account liberalization under financial repression. As a result, along a transition path with a declining SOE share, welfare-maximizing policy calls for 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