Original scientific paper
https://doi.org/10.18045/zbefri.2019.1.11
Does the Mundell-Fleming model fit in China?
Kai-Hua Wang
; Qingdao University-School of Economics, 308 Ningxia Road, Qingdao, Shandong, China
Chi-Wei Su
; Qingdao University-School of Economics, No. 308 Ningxia Road, Qingdao, Shandong, China
Ran Tao
; Department of Noninfectious Chronic Disease, Qingdao Municipal Center for Disease Control & Preventation, No. 175 Shandong Road, Qingdao, Shandong, China
Abstract
This paper examines the causal relationship between interest rate differential (IRD) and international short-term capital flow (SCF) to determine whether such a relationship in China supports the Mundell-Fleming model. With structural changes existing, we find that long-run relationship using full-sample data is unstable, suggesting that causality test is not reliable. Consequently, we use a time-varying rolling-window approach to revisiting the dynamic causal relationship, and the results show that IRD has both positive and negative impacts on SCF in several sub-periods, but SCF has no effect on IRD in China. When China suffers external and internal shocks, SCF should not be curbed only by adjusting IRD. Therefore, it is critical for policymakers to pay attention to specific backgrounds (e.g. economic situation, monetary policies) and further employ interest rate and fiscal policies in reducing negative influence from SCF on the Chinese economy.
Keywords
Mundell-Fleming model; short-term capital flow; interest rate differential; rolling window; time-varying causality
Hrčak ID:
221666
URI
Publication date:
28.6.2019.
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