How to Promote the Exchange Rate Marketization and Capital Account Liberalization in the Stage of High Quality Development of Economy? Empirical Evidence from 134 Economies

Abstract

The promotion order between exchange rate marketization and capital account openness is one of the hotspots and debates in the field of international finance. Some scholars support the reform order of internal first, external next”, while others believe that they should be promoted in a coordinated manner. In view of the above two points, some scholars try to use econometric methods such as the Granger causality test and VAR model to determine the promotion order, but these methods are often limited to the selection of samples and depend on the data to a large degree, and different samples may draw different conclusions. Due to the lack of a reference system, the promotion order between exchange rate marketization and capital account openness is not determined. What is the basis or determination? The economic development level, total factor productivity or financial stability? If there is no basis, it is difficult to make a clear judgment on the promotion strategy. If the reference system is abandoned, the investigation only based on the data does not have practical significance.　　In view of this, this paper refers to the study of Rodriguez（2017）, constructs the influence equation of the exchange rate regime on total factor productivity（with capital account openness as the conversion variable）and the influence equation of capital account openness on total factor productivity（with the exchange rate system as the conversion variable）, respectively. Moreover, total factor productivity is selected as the reference system, and a non-linear modeling technology PSTR model is adopted to investigate the promotion strategy. It is revealed that the exchange rate regime has a significant non-linear effect on total factor productivity, the influence coefficient changes from negative to positive with the increase of capital account openness, which indicates that capital account openness can weaken the negative impact of exchange rate fluctuations on total factor productivity. The influence coefficient of capital account openness on total factor productivity is negative, and it shows obvious stage characteristics with the change of the exchange rate regime. When the exchange rate regime is flexible enough, its negative impact decreases significantly, which indicates that a more flexible exchange rate regime is conducive to absorbing the negative impact of capital account openness. Therefore, with total factor productivity as a reference system, there is a mutual adjustment mechanism between exchange rate marketization and capital account openness. Capital account openness is the premise of exchange rate marketization, and exchange rate marketization is also the prerequisite of capital account openness. They should be promoted in a coordinated way. 　　Compared with the existing results, the possible contributions of this paper are as follows: First, the exchange rate regime and capital account openness are taken as the key explanatory variable and adjustment variable respectively, which enriches the literature with respect to the promotion order of exchange rate marketization and capital account openness, and overcomes the shortcomings of the existing literature that only employ one of them as the key explanatory variable and adjustment variable, making the research more comprehensive and detailed. Second, compared with most existing literature that directly adopt the interactive terms（only the first-order non-linear relations can be identified）, this paper utilizes a non-linear method—the PSTR model, which can identify higher-order non-linear relations and solve the problem of missing implicit non-linear relations. Third, compared with most existing literature focusing on economic growth or financial crisis, this paper conducts the analysis from the perspective of total factor productivity to re-judge the promotion order. The study can provide theoretical support and a decision-making basis for how to promote exchange rate marketization and capital account openness in the constitutive reform and transition from quantitative growth to qualitative development of China’s economic development.