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Flow-Specific Capital Controls for China

Author

Listed:
  • Fernando Garcia-Barragan

    (University of Guanajuato)

  • Chris Garbers

    (University of Stellenbosch)

  • Guangling Liu

Abstract

This paper examines how flow-specific capital controls affect business cycle fluctuations and welfare in China. We develop an asymmetric two-country model to provide an emerging market perspective and introduce both inflow and outflow capital controls. The results indicate that both flow-specific capital controls effectively manage their respective capital flows, mitigate the effects of foreign interest rate shocks on business cycle fluctuations, and enhance welfare through the balance sheet channel and the collateral constraint channel. Imposing controls on the real sector significantly impact the dynamics of home and foreign credits and the real economy. In contrast, when controls are imposed on financial intermediaries, they have minimal effects on the dynamics of other financial and real variables. Lastly, flow-specific capital controls are effective in stabilizing capital flows with relatively low costs in terms of the volatility of output.

Suggested Citation

  • Fernando Garcia-Barragan & Chris Garbers & Guangling Liu, 2025. "Flow-Specific Capital Controls for China," ERSA Working Paper Series 106, Economic Research Southern Africa.
    • Handle: RePEc:rza:ersawp:106
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    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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