Short-term Capital Flows Shocks, Financial Fragility and Systematic Risk
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| Title | Short-term Capital Flows Shocks, Financial Fragility and Systematic Risk
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| Author | Wang Bo, Hao Dapeng and Li Li |
| Organization | Nankai University; Renmin University of China; Peking University |
| Email | nkwangbo@nankai.edu.cn；haodp@ruc.edu.cn;nklili0903c@163 |
| Key Words | Short-term Capital Flows; Financial Fragility; Financial Risk Index; Systemic Risk |
| Abstract | In this paper, we construct a new Keynesian open DSGE model with short-term capital flows and an endogenous fragile financial sector, and use the dynamic factor model to construct the financial risk index to reflect the operation condition of China's financial system, then use the MS-FAVAR model to test the dynamic impact of short-term capital outflow on China's macroeconomic and financial sectors. The main results show that: Firstly, transnational short-term capital flows have a significant impact on China's financial system. And short-term capital outflow will increase the bank's bankruptcy probability, leading to a significant increase in the vulnerability of domestic financial system and systematic financial risk. Besides, China's transnational short-term capital flows have undergone obvious structural changes, and the scale of flows and volatility has significantly increased. Finally, as the increase of short-term capital flows’ scale and volatility, its impact on the fragility of the domestic financial system and macroeconomic contractionary effect will be further amplified. Therefore, China's central bank should carefully promote the opening of capital accounts, and further improve the prudent management system of transnational short-term capital flow to maintain financial stability and prevent systematic risk. |
| Serial Number | WP1384 |
| Time | 2019-06-20 |
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