Jennifer T. Lai

Intergovernmental Fiscal Arrangements and Provincial Consumption Risk Sharing in China

This paper utilizes a panel data set on two major fiscal reforms in China—the fiscal contract system (FCS) in 1980-93 and the tax-sharing system (TSS) after 1994—to examine how the various aspects of intergovernmental fiscal arrangement affect the ability of the fiscal system to facilitate risk sharing. The high revenue decentralization and the proliferation of extrabudgetary revenue items in the FCS generally weakened the central governments ability to support interprovincial risk sharing. This situation was reversed in the TSS period. In addition, the effect of central-to-local transfer (transfer-in) and local-to-central transfer (transfer-out) on risk sharing was asymmetric in the sense that transfer-out enhances risk sharing but transfer-in does not.

Kaldorian Disaggregation, Temporary Migration and Welfare: Theory and Calibration

In this paper we examine a four-good, four-factor model of trade with two agents: domestic residents and temporary migrants. This modelling framework has three important features: first, there are two tradable and two non-tradable goods; second, there exists Kaldorian disaggregation in consumption; third, the structure incorporates a combination of price adjustment. The results emphasize the influence of factor accumulation at constant traded goods prices on the variable prices of non-traded goods. We also analyse the impact of temporary migration and other structural parameters on domestic welfare. To highlight our results, our model is calibrated on a typical small open economy, Hong Kong, and a wide array of situations are presented when temporary migration and Kaldorian disaggregation can reduce domestic welfare in response to exogenous shocks.

Is the Provincial Capital Market Segmented in China

This paper evaluates the degree of provincial capital mobility in China since 1978 by estimating the saving‐retention rate in the Feldstein and Horioka framework. It is found that the estimate of the saving retention rate tends to be biased downward if we fail to decompose the investment and saving rates into the private and government components. After the decomposition, we find that the private capital mobility was low prior to the 1990s, but improved notably in the more recent period. We also find that the saving‐retention rate for the government sector remains negative throughout the sample, which can partially be explained by the governments reallocation of capital from the more productive regions to the less productive regions. Comparing the results of China with those of Japan shows that Japan had a much higher degree of prefectural capital mobility than China before the 1990s, but the gap gradually closed up afterwards.

Kaldorian Disaggregation, Temporary Migration and Domestic Welfare

We build a model with two agents: domestic residents and temporary immigrants. The model incorporates Kaldorian disaggregation, with the two groups consuming different goods produced in the economy. It is established that, under certain conditions, an increase in immigrant labor lowers the welfare of the domestic residents. This runs against conventional wisdom that temporary immigration enhances the welfare of domestic residents.

China's Capital and ‘Hot’ Money Flows: An Empirical Investigation: China's Capital and ‘Hot’ Money Flows

We examine time-series characteristics of Chinas capital flows during 1998-2014. More specifically, we employ Kalman filtering state-space models to gauge relative importance of permanent and transitory components in Chinas overall FDI, equity, bond, other investment, and bank credit flows. Our results show that only in the case of FDI are both gross inflow and net flow dominated by a permanent stochastic level, suggesting that this source of capital is largely permanent. Incorporating covariates into the state-space models, we find that larger difference between RMB onshore and offshore interest rates encourages capital inflows that are dominated by a transitory component. Greater global risk perception, proxied by S&P 500s volatility index, on the other hand, discourages them. These covariates imply that capital control may not be effective in stemming volatile and speculative flows. Our results on bilateral capital flows between China and US also suggest that these flows are less persistent and more volatile during 1998-2014 than previously found based on 1988-1997 data. Our results bear important policy implications as China engages in further reforms in its domestic financial system and greater integration with the world financial system.

China's Capital and 'Hot' Money Flows: An Empirical Investigation

We examine time-series characteristics of China’s capital flows during 1998-2014. More specifically, we employ Kalman filtering state-space models to gauge relative importance of permanent and transitory components in China’s overall FDI, equity, bond, other investment, and bank credit flows. Our results show that only in the case of FDI are both gross inflow and net flow dominated by a permanent stochastic level, suggesting that this source of capital is largely permanent. Incorporating covariates into the state-space models, we find that larger difference between RMB onshore and offshore interest rates encourages capital inflows that are dominated by a transitory component. Greater global risk perception, proxied by S&P 500’s volatility index, on the other hand, discourages them. These covariates imply that capital control may not be effective in stemming volatile and speculative flows. Our results on bilateral capital flows between China and US also suggest that these flows are less persistent and more volatile during 1998-2014 than previously found based on 1988-1997 data. Our results bear important policy implications as China engages in further reforms in its domestic financial system and greater integration with the world financial system.