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This paper investigates the link between hot money and business cycle volatility in Chinafrom January 1997 to December 2009.Using the structural vector error correction model,we find a considerable degree of long-run cointegration and bidirectional causality effectsbetween hot money and business cycle volatility.The speculative shocks are found totemporarily promote China’s economic growth, but also to exacerbate business cyclevolatility.The liquidity shock stemming from hot money is shown to be the primary factorresponsible for the significantly enhanced fluctuation in business cycles during the mostrecent global financial crisis period.This could be detrimental to the smooth operation offinancial markets.Therefore, in forming future policies, it is critical for policy-makers totake precautions against the speculative factors.
This paper investigates the link between hot money and business cycle volatility in China from January 1997 to December 2009.Using the structural vector error correction model, we find a considerable degree of long-run cointegration and bidirectional causality effectsbetween hot money and business cycle volatility. speculative shocks are found totemporarily promote China’s economic growth, but also to exacerbate business cyclevolatility. liquidity shock stemming from hot money is shown to be the primary factorresponsible for the significant enhanced fluctuation in business cycles during the mostrecent global financial crisis period.This could be detrimental to the smooth operation offinancial markets.Therefore, in forming future policies, it is critical for policy-makers totake precautions against the speculative factors.