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Can “Concerted” Macroprudential Policies Mitigate Cross‐border Contagion of Financial Risks? Evidence from China and Its Financially Connected Economies
Author(s) -
Liu Xiaoyu,
Chen Xiaoli
Publication year - 2021
Publication title -
china and world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.815
H-Index - 28
eISSN - 1749-124X
pISSN - 1671-2234
DOI - 10.1111/cwe.12375
Subject(s) - spillover effect , financial contagion , emerging markets , china , systemic risk , macroprudential regulation , economics , capital flows , capital (architecture) , monetary economics , capital control , financial crisis , financial risk , finance , financial market , international economics , business , financial system , macroeconomics , market economy , history , archaeology , liberalization , political science , law
Abstract We construct a connected network between China and the economies that are financially linked to it, based on the network topology of variance decompositions, and measure the cross‐border contagion of financial risks among these economies. We then examine whether the concerted use of macroprudential policies mitigates the cross‐border contagion of financial risks. The empirical results show that the tightening of macroprudential policies, especially counter‐cyclical capital buffers and limits on credit growth, in economies with net spillover risk (e.g. the US and China), can reduce the cross‐border spillover of domestic financial risks to other economies. The concerted use of macroprudential policies can contribute to global financial stability. However, the tightening of “capital” macroprudential policy tools will increase domestic cross‐border absorption of financial risks. Hence, macroprudential regulation of cross‐border capital flows must be strengthened.