What Is the Difference Between an Open and Closed Economy?

In the sense of economics, open economy means that a country has economic relations with foreign countries, and there is a close relationship between its own economy and foreign economy. The open economy has three levels: (1) the product market is open, that is, there is import and export of product trade; (2) the capital market is open, that is, capital is allowed to flow freely; There are relatively few countries with factor markets open, especially in developed countries. This market is banned to protect the employment of nationals. ^[1]

Open economy

Countermeasures for the adjustment of monetary policy in an open economy

Expanding the RMB exchange rate floating range

(1) Expand the floating range of the RMB exchange rate and obtain the independence of monetary policy. Expand the floating range of the RMB exchange rate,

Open economy

It can effectively reduce the impact of international arbitrage and arbitrage on domestic currencies caused by fixed exchange rate objectives, exert the role of exchange rates in regulating foreign exchange supply and demand, and capital flows, strengthen the coordination of exchange rate policies and interest rate policies, and achieve internal and external balance; reduce maintenance The pressure of fixed exchange rate targets on the size of foreign exchange reserves weakens the internal relationship between foreign exchange reserves and the money supply, and improves the central bank's leading role in currency control.

Improve market mechanism

(2) Improve market mechanisms and establish effective monetary policy tools. First, we must expand the scale of open market operations. The open market business can adjust the interest rate through the money market and the exchange rate through the foreign exchange market. It is the best place to achieve internal and external equilibrium. Second, we must make reasonable use of the refinancing of the central bank. In view of the concentration of deposits in state-owned commercial banks, the central bank may appropriately increase refinancing of small and medium-sized banks with good reputation and good asset quality. In addition, we must also play the role of rediscounting and other tools in the release of base currency, and use the combination of policies and supporting measures to expand the base currency.

Improve domestic financial markets

(3) Improve domestic financial markets. First of all, the marketization of interest rates should be actively promoted. Only the interest rates formed by the market can give full play to the role of interest rates influencing the behavior of market entities and the entire national economic activity, and can ensure the effective implementation of monetary policy. Second, accelerate the transformation of state-owned commercial banks to modern corporate systems and shape rational financial market players. At the same time, the capital market and currency market will be further developed, financing channels will be expanded, and investment opportunities will be increased.