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Does the Mundell-Fleming model fit in China?

Author

Listed:
  • 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

    (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.

Suggested Citation

  • Kai-Hua Wang & Chi-Wei Su & Ran Tao, 2019. "Does the Mundell-Fleming model fit in China?," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 37(1), pages 11-28.
    • Handle: RePEc:rfe:zbefri:v:37:y:2019:i:1:p:11-28
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    More about this item

    Keywords

    Mundell-Fleming model; short-term capital flow; interest rate differential; rolling window; time-varying causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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