The effect of financial openness on international financial risk contagion based on DSGE model

Yu Feng, Xizi Wang and Minwen

Abstract

Since entered WTO, China’s financial market has opened up gradually. However, faced with the sub-prime crisis in 2008, China suffered destruction ,especially for financial institutions that are exposed directly to international environment. Consequently, China stopped its preparations for financial liberalization. To solve the issue that whether should China keep opening up or strengthen capital control, this article chooses New Keynesian dynamic statistic general model to investigate relationships between financial openness and risks transmitted by international output shocks. Besides, this article assigns variables through calibration and appraisement, then adopts commen monte carlo random simulation method .It is suggested that when international output shocks occur, with the increase of financial openness, the volatility of domestic macroeconomic variables decrease. That is, financial openness can effectively decrease risks from international output shocks and improve stability of China’s macro economy.