Optimal Capital Account Openness in China

Abstract

This paper measures the degree of capital account openness and financial stability index, and uses GDP to represent economic development. Recent research mainly focuses on the qualitative research of capital account openness on financial stability and economic development. This paper tries to find the optimal degree of capital account openness based on current economic structure and financial situation through quantitative methods. I use Kalman filter to measure the degree of capital account openness based on the interest rate parity theory and defines the degree of capital account openness as λ, the range of λ is [0, 1]. For the measurement of financial stability, this paper adopts principal component analysis method, and selects 17 groups of data related to financial stability to measure it. Based on these two sets of figures, as well as monthly GDP data, establishes TVAR model, studies the impulse response graph, and determines the impact on financial stability index, GDP and λ. This paper uses support vector machine regression (SVR) to quantitatively analyze the relationship among capital account openness, economic development, and financial stability.