1. 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:

2. 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

3. 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

4. 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

5. 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

6. 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) ?

7. 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

8. 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

9. 2. XRT affects markup in the short run ?

10. 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.

11. 4. Time frequency appropriate ? The failure of the empirical test (the 2 nd 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)

12. 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 ?