A Model of Chinese Capital Account Liberalisation

Luk, Paul

doi:10.2139/ssrn.2311185

Cited by 5 publications

(3 citation statements)

References 37 publications

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“…International reserve accumulation has been studied extensively by researchers in the field of international macroeconomics, both empirically and theoretically. They have considered its role as a self-insurance or precautionary savings due to roll-over risk ( Bianchi et al, 2016;Hur and Kondo, 2016;Jeanne, 2007;Jeanne and Rancière, 2011 ), investigated its connection to an export-led growth strategy ( Dooley et al, 2003 ) and ( Bernanke, 2005;Dooley et al, 2005 ), looked into tensions between mercantilistic and insurance motives and ( Aizenman and Lee, 2008;Beck and Weber, 2011;Calvo et al, 2012;Choi and Taylor, 2017;Ghosh et al, 2017 ), examined connections to financial instability ( Obstfeld et al, 2010 ), explored it as a crisis-easing mechanism ( Bussière et al, 2015;Dominguez et al, 2012 ), and probed its relationship to financial development and openness ( Bacchetta et al, 2013;Benigno and Fornaro, 2012;He and Luk, 2017;Jeanne, 2013;Wen, 2011 ). To our knowledge, we are the first to formally apply the idea of model uncertainty to understand the surge in international reserves after the Asian Financial Crisis.…”

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confidence: 99%

The Asian Financial Crisis and international reserve accumulation: A robust control approach

Lee

Luk

2018

Journal of Economic Dynamics and Control

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Standard macroeconomic models have difficulties accounting for the surge in international reserves of Asian countries in the aftermath of the Asian Financial Crisis of 1997. We propose precautionary demand for saving generated by model uncertainty as an important driver of this phenomenon. Using Korean data, we estimate a simple permanent income model augmented with model uncertainty, find a structural break at the point of the Asian Financial Crisis, and identify a rise in concern for model misspecification which is distinct from an increase in income volatility. The post-crisis concern for model misspecification implies a reasonable detection error probability. We also show that learning serves as an additional powerful amplification mechanism in our framework.

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Section: Introductionmentioning

confidence: 99%

The Asian Financial Crisis and international reserve accumulation: A robust control approach

Lee

Luk

2018

Journal of Economic Dynamics and Control

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“…Mendoza, Quadrini, and Ríos‐Rull () attribute the difference in a country's financial portfolio to differences in financial development. Devereux and Sutherland () and He and Luk () consider capital flows to an emerging economy using endogenous portfolio choice models. They do not consider borrowing constraints, so the equilibrium asset holding is driven by the hedging characteristics of the different types of assets.…”

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Foreign Direct Investment and Debt Financing in Emerging Economies

Luk¹,

Zheng

2019

J of Money Credit Banking

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The rich dynamics of capital flows is an important characteristic of business cycles in emerging market economies. In the data external debt is always procyclical, while FDI is procyclical only in normal times. We provide a microfounded rationale for this pattern by linking financial shocks to capital flows. For this purpose, we build a small open economy model in which firms are subject to borrowing constraints, and are either owned domestically or by foreign investors who purchase firms through FDI. During a financial crisis, the valuation gap per unit net worth between foreign and domestic investors widens, which triggers more FDI inflow. Our model produces business cycle moments consistent with empirical observations. JEL codes: E44, F41, F44, F62

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“…We tackle this question in a separate work in He and Luk (), in which we build a two‐country dynamic stochastic general equilibrium model with endogenous portfolio choice and analyse the optimal portfolios before and after the capital account liberalisation.…”

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Internationalisation of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects

Luk

Zhang

2016

Pacific Economic Review

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This paper develops a three-currency model to study the determinants of the demand for assets and liabilites denominated in an international currency and to shed light on the prospects for the renminbi as a budding international currency. We show that interest rate differentials would be only one of the factors shaping the renminbi's position, while other factors, including the correlation between foreign countries' economic growth and their bilateral exchange rates against the renminbi, and the correlation between exchange rates of the renminbi with other international currencies, would also be important. A broad interpretation of these findings is that the renminbi will likely be attractive to investors from high-income economies and fund-raisers from emerging market economies.

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A Model of Chinese Capital Account Liberalisation

Cited by 5 publications

References 37 publications

The Asian Financial Crisis and international reserve accumulation: A robust control approach

The Asian Financial Crisis and international reserve accumulation: A robust control approach

Foreign Direct Investment and Debt Financing in Emerging Economies

Internationalisation of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects

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