Discussion of “RMB Exchange Rate Changes, Income Distribution and

Capital Accumulation”

By Li and Cheng

Toshihiro OkadaPrepared 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() are constant,

Z= price markup, p=product price, E=nominal XRT

- Assumes Z(E). Then the model’s key equation is

• 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 ?