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A Balancing Act for Financial Opening and Financial Stability

Jun 24-2020   



The opening up of the financial industry is of great importance, yet a policy mechanism is required to maintain the stability of economic and financial systems. Notwithstanding its impetus to efficiency gains, financial opening-up might cause an increase in fluctuations, which in turn might breed severe financial crisis, writes Prof. Huang Yiping, Deputy Dean of the NSD, in a commentary for The Beijing Daily.

 

Two issues are worthy of in-depth study. Before the global economic crisis, monetary policies had been capable of stabilizing economic and financial systems. Since then, it has been found that monetary policies might contain inflations but not financial risks. Herein arises the first issue: are monetary policies capable of safeguarding financial stability?

 

To cope with the economic crisis, the developed countries have resorted to quantitative easing and such policies have produced great effects for their economic and financial systems. However, many emerging markets have had to suffer the externality of such policies, notably a sharp contraction in monetary policies and economic environment once the developed countries tighten monetary supply. Undoubtedly, China will forge ahead with opening up. But how to ensure stability in the process? This is the other question worthy of profound discussions.

 

In 2009, the People’s Bank of China began to examine macro prudent policies and China’s regulatory framework has since featured dual-pillar macro-control, consisting of monetary policies and macro prudent policies to safeguard macro-economic stability. Many international organizations, such as FSB and BIS, have also undertaken many researches in this regard.

 

Prof. Huang and his team have recently used a two-country dynamic general equilibrium model to test the impact of different policy mechanisms on the sudden pause of capital flow, the biggest difficulty faced by many emerging markets after throwing open the door to their financial markets. When capital inflow comes to an abrupt stop due to some special reasons, a country will see its financial risk soar and its balance sheet deteriorate. This is when a recipe of monetary policies and macro-prudent policies can mitigate the adjustment process and shore up the stability of domestic macro-economy.

 

The analysis by Prof. Huang’s team also finds that if China’s currency exchange rate shifts to a relatively flexible floating one, macro-economic stability will benefit.

 

 

A Balancing Act for Financial Opening and Financial Stability

Jun 24-2020   



The opening up of the financial industry is of great importance, yet a policy mechanism is required to maintain the stability of economic and financial systems. Notwithstanding its impetus to efficiency gains, financial opening-up might cause an increase in fluctuations, which in turn might breed severe financial crisis, writes Prof. Huang Yiping, Deputy Dean of the NSD, in a commentary for The Beijing Daily.

 

Two issues are worthy of in-depth study. Before the global economic crisis, monetary policies had been capable of stabilizing economic and financial systems. Since then, it has been found that monetary policies might contain inflations but not financial risks. Herein arises the first issue: are monetary policies capable of safeguarding financial stability?

 

To cope with the economic crisis, the developed countries have resorted to quantitative easing and such policies have produced great effects for their economic and financial systems. However, many emerging markets have had to suffer the externality of such policies, notably a sharp contraction in monetary policies and economic environment once the developed countries tighten monetary supply. Undoubtedly, China will forge ahead with opening up. But how to ensure stability in the process? This is the other question worthy of profound discussions.

 

In 2009, the People’s Bank of China began to examine macro prudent policies and China’s regulatory framework has since featured dual-pillar macro-control, consisting of monetary policies and macro prudent policies to safeguard macro-economic stability. Many international organizations, such as FSB and BIS, have also undertaken many researches in this regard.

 

Prof. Huang and his team have recently used a two-country dynamic general equilibrium model to test the impact of different policy mechanisms on the sudden pause of capital flow, the biggest difficulty faced by many emerging markets after throwing open the door to their financial markets. When capital inflow comes to an abrupt stop due to some special reasons, a country will see its financial risk soar and its balance sheet deteriorate. This is when a recipe of monetary policies and macro-prudent policies can mitigate the adjustment process and shore up the stability of domestic macro-economy.

 

The analysis by Prof. Huang’s team also finds that if China’s currency exchange rate shifts to a relatively flexible floating one, macro-economic stability will benefit.