Download Discussion of *RMB Exchange Rate Changes, Income Distribution

Discussion of “RMB Exchange Rate Changes,
Income Distribution and Capital
Accumulation”
By Li and Cheng
Toshihiro Okada
Prepared for the 9th International Workshop of MIFN:
Question
• Relationship between XRT(exchange rate) , income distribution and
capital accumulation
• Specially, China: relationship between nominal RMB XRT, profit share
in output, and fixed asset growth
Methodology
• Builds a simple Neo-Kaleckian open economy model
* Assumes workers consume and capitalists save
* Assumes monopolistic competition
• Tests theoretical hypotheses, using panel data (firm-level data on
total profits/output, fixed assets, .. .)
* Uses Sobel mediation test
Results (theoretical)
• Finding 1 (theoretical): RMB XRT has an effect on income distribution
between workers (wages) and firm owners (profits)
* The direction of the effect is uncertain
• Finding 2 (theoretical): Indirect (mediation) effect of RMB XRT on
capital accumulation, mediated by income distribution
XRT→ profit share → capital accumulation
* If RMB depreciation increases firms’ profit shares,
the depreciation increases capital accumulation
Results (empirical)
• Finding 3 (empirical): RMB XRT has a significant effect on the income
distribution
* RMB depreciation increases firms profit share & wage share
* The effect is larger for profit share
RMB depreciation increases income inequality
• Finding 4 (empirical): Income distribution (profit share) does not
“mediates” the relationship between RMB XRT and capital
accumulation
Results (empirical)
• Finding 5(empirical): The (positive) effect of firms profit share on
capital accumulation depends on a firm-ownership structure
(Importance of a firm-ownership structure)
*The profit share effect is larger in state-owned firms than in
foreign funded firms
agency problem (managerial empire building) ?
My reaction
• A very important and interesting question: does XRT affect economic
growth ? If yes, how? XRT→Income Distribution→Growth
• Empirically well-examined
But,
• Raises many more questions
1. short-run or long-run (modelling)
• At one point, assumes “short-run” :constant technology & constant
wage
• At another point, assumes “long-run” : firms change their markup to
keep up competitiveness when XRT changes.
Growth (long-run) or Business cycles (short-run) ?
* The empirical part uses annual frequency data
2. XRT affects markup in the short run ?
- Assumes technology (a&b), nominal wage(W), foreign price(𝑝𝑚 ) are
constant,
𝑝 = 𝑧(1 + 𝐸)
Z= price markup, p=product price, E=nominal XRT
- Assumes Z(E). Then the model’s key equation is
1
π=1−
𝑧(𝐸)
• Better to check whether XRT affects markup in the short run
(But, measuring markup is difficult)
*Nekarda & Ramey (2013) “The Cyclical Behavior of the Price-Cost Markup”
3. No optimization & no interest rate in investment
• No interest rate in the investment function
*In the panel estimation, XRT explains time variation.
Missing interest rates could largely affect the result.
4. Time frequency appropriate ?
• The failure of the empirical test (the 2nd part) could be due to using
year-to-year capital growth rates
* the profit share effect on capital could be unimportant in the
short run
• If the purpose is to analyze the long-run effect, using cross-sectional
or lower frequency panel data would be better (but, if so, might
need to change the model)
5. Better to model incomplete financial market
• Argues importance of an incomplete financial market in China, but
does not analyze that in the model.
*If the firm-ownership structure is empirically found to be important,
introducing incomplete financial market (e.g. borrowing constraint)
with/without agency problem might get interesting insights ?