Simulating the impact of foreign capital in an open-economy macroeconomic model of China

Abstract

Since 1978, China's open-economy reform process has been the subject of increasing academic interest. A pioneering medium-sized econometric model is constructed using the SNA accounting framework and taking into account the stylized facts of the country's reforms and her absorption of foreign capital. In estimation, the ‘general to specific’ and error-correction modelling techniques are adopted wherever appropriate. A 50% reduction in foreign capital utilized and a total absence of flows from Hong Kong are simulated, yielding interesting insights into the operation of the opening of the Chinese economy.