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The Effects of Financial Decoupling of the U.S. and China: Simulations with a Global Financial CGE Model

Author

Listed:
  • P.B. Dixon
  • J.A. Giesecke
  • J. Nassios
  • M.T. Rimmer

Abstract

We add a financial module to the GTAP model, built around an 18-region asset-liability matrix. We simulate financial decoupling between the U.S. and China. We find that the U.S. would gain by limiting its capital flows to China, leading to a redirection of finance to the domestic economy. This would stimulate investment in the U.S. with favorable effects on employment, capital stocks, real GDP, wealth and real wage rates. At the same time investment in China would decline with negative effects on the Chinese economy. Similarly, China would gain by limiting its capital flows to the U.S. and the U.S. would lose. In a tit-for-tat situation in which each country reduces its financial-asset holding in the other country by x per cent, the winner would be China. We conduct additional simulations to compare the effects of trade decoupling with those of financial decoupling.

Suggested Citation

  • P.B. Dixon & J.A. Giesecke & J. Nassios & M.T. Rimmer, 2020. "The Effects of Financial Decoupling of the U.S. and China: Simulations with a Global Financial CGE Model," Centre of Policy Studies/IMPACT Centre Working Papers g-309, Victoria University, Centre of Policy Studies/IMPACT Centre.
    • Handle: RePEc:cop:wpaper:g-309
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    References listed on IDEAS

    as
    1. Hertel, Thomas, 1997. "Global Trade Analysis: Modeling and applications," GTAP Books, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, number 7685, December.
    2. Ianchovichina,Elena & Walmsley,Terrie L. (ed.), 2012. "Dynamic Modeling and Applications for Global Economic Analysis," Cambridge Books, Cambridge University Press, number 9781107011694, January.
    3. Ianchovichina,Elena & Walmsley,Terrie L. (ed.), 2012. "Dynamic Modeling and Applications for Global Economic Analysis," Cambridge Books, Cambridge University Press, number 9781107002432, January.
    4. Kostas Mavromaras & James A. Giesecke & Peter B. Dixon & Maureen T. Rimmer, 2017. "The Economy-wide Impacts of a Rise in the Capital Adequacy Ratios of Australian Banks," The Economic Record, The Economic Society of Australia, vol. 93, pages 16-37, June.
    5. Peter B. Dixon & Maureen Rimmer & Nhi Tran, 2019. "GTAP-MVH, A Model for Analysing the Worldwide Effects of Trade Policies in the Motor Vehicle Sector: Theory and Data," Centre of Policy Studies/IMPACT Centre Working Papers g-290, Victoria University, Centre of Policy Studies/IMPACT Centre.
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    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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