essays on income inequality exchange rate and policy coordination

Copyright by Xiaojun Yang 2003 The Dissertation Committee for Xiaojun Yang Certifies that this is the approved version of the following dissertation: Essays on Income Inequality, Exchange Rate, and Policy Coordination Committee: David A Kendrick, Supervisor Li Gan Vince Geraci William Glade Hong Yan Essays on Income Inequality, Exchange Rate, and Policy Coordination by Xiaojun Yang, B.A., M.I.A., M.S Dissertation Presented to the Faculty of the Graduate School of The University of Texas at Austin in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy The University of Texas at Austin May 2003 UMI Number: 3116243 UMI Microform 3116243 Copyright 2004 by ProQuest Information and Learning Company All rights reserved This microform edition is protected against unauthorized copying under Title 17, United States Code ProQuest Information and Learning Company 300 North Zeeb Road PO Box 1346 Ann Arbor, MI 48106-1346 Acknowledgements I am deeply indebted to my supervisor Professor David A Kendrick for his kind guidance, advice and encouragement Under his consistent, conscientious gained and patient supervision, I have insight about macroeconomics and computational economics, importantly how to approach academic research I will continue to value his friendship I also owe thanks to the other member of the dissertation committee: Dr Li Gan, Dr Vince Geraci, Dr William Glade, Dr Hong Yan, for their valuable discussions and suggestions, and for their generosity and kindness Also, I would like to express my appreciation to Seung-Rae Kim and Marco Tucci for their intellectual and technical advice Finally, I express my special thanks to my parents for their lasting support and love iv Essays on Income inequality, Exchange Rate, and Policy Coordination Publication No. _ Xiaojun Yang, Ph.D The University of Texas at Austin, 2003 Supervisor: David A Kendrick The goal of this dissertation is to develop and to use computational methods to study issues in policy coordination, exchange rates and income inequality The topic of policy formulation among interdependent economies has received much attention in the literature In the first essay a two-country model is used to illustrate the interdependence of China’s and Hong Kong’s economies Not surprising, we find that the policy effect is asymmetric, due to difference in size Shocks to the Chinese economy will affect Hong Kong’s stable economic growth In order for Hong Kong to keep a stable growth, both governments must act in certain ways Particularly, by importing more China can help Hong Kong’s economy, especially during the financial crisis years We find that fiscal policy is v more effective than monetary policy in affecting economic activities in this model In the second essay, we develop a model to study the behavior of the Yuan/Dollar exchange rate The parameter values estimated for the model are such that when China increases its relative money supply, the exchange rate appreciates, which is different than the conventional result Also the parameter values indicate that in order for China to have a higher level of GDP, China has to increase its money supply; and for a stable exchange rate, China either decreases its money supply then increases it or increases its money supply during the entire period The right policy hinges on the desired path for the exchange rate Since the model is simple in essence, the results should be interpreted with caution The third essay analyses the contribution of different factors to the determination of income inequality The questions regarding whether greater income inequality is conducive to China's growth and the role of degree of reform for growth and inequality have been studied in the paper We find a positive correlation between income inequality and growth, that reform plays a dominant role in determining growth and income inequality, and that steady growth can not be emphasized too much, otherwise the reform process will be reversed, which is not practical Finally, the tradeoff between income inequality and growth is analyzed vi Table of Contents Chapter One: Introduction Chapter Two: Economic Interaction and Policy Coordination Between China and Hong Kong 2.1 Introduction 2.2 The Model 2.3 The Optimal Control Theory 10 2.4 The Model with Price Variables 32 2.4.1 The Model Equations… 32 2.4.2 Simulations 39 2.4.2.1 Historical Simulation 39 2.4.2.2 Policy Simulation 43 2.4.2.2.1 Fiscal Expansion 43 2.4.2.2.2 Monetary Expansion 49 2.5 The Model with Price Variables in the Control Theory Framework 50 Chapter Three: Yuan - Dollar Exchange Rate Model 62 3.1 Introduction 62 3.2 Developments of China's Foreign Exchange System 63 3.3 The Model 71 3.3.1 The Model Equations… 72 3.3.2 Data 74 3.3.3 Estimation 75 3.3.4 Policy Simulation 77 3.4 The Control 82 3.4.1 The Control Framework 82 3.4.2 Results and Experiments 86 vii 3.5 Conclusion 95 Chapter Four: Reform, Inequality, and Growth 96 4.1 Introduction 96 4.2 Factor Consideration 97 4.3 The Model 102 4.4 Control and Sensitivity Analyses 112 4.4.1 The Control Framework 112 4.4.2 Sensitivity Analysis 117 4.4.2.1 Sensitivity Analysis from 1991 to 1998 119 4.4.2.2 Sensitivity Analysis from 1998 to 2010 132 4.4.2.2.1 Caring More about Income Inequality 135 4.4.2.2.2 Caring More about Growth Rate 140 4.4.2.2.3 Greater Difficulty to Further Reform 144 4.4.2.2.4 Inequality verse Growth 149 4.5 Conclusion 152 Appendix A-1 Historical Simulation 154 Appendix A-2 Simulation Results for China's Fiscal Expansion 158 Appendix A-3 Duali Input File 162 Appendix A-4 Duali Input File 179 Appendix B-1 Comparison of Different Money Supply 198 Appendix B-2 Duali Input File 199 Appendix C-1 Constant Inequality, Growth and Inflation 204 Appendix C-2 Duali Input File 206 Appendix D-1 Data-China 212 Appendix D-2 Data-Hong Kong 220 viii Appendix D-3 Data-US 226 Bibliography 228 Vita 231 ix essays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordination Year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 savings deposites rate 2.127691667 3.293525 5.788108333 5.913883333 4.714516667 2.325266667 1.5 2.447583333 4.1975 3.773333333 4.075833333 5.1875 3.746666667 4.465833333 12-month time deposite rate 4.234066667 5.386308333 8.038108333 8.163883333 6.964516667 4.575266667 3.75 5.174408333 6.268675 5.187583333 6.38365 8.30855 5.762216667 5.401833333 224 labor force 272.8 276.3 275.3 274.8 280.4 279.2 285.6 292.9 300.1 316.1 323.5 327.6 332 337.4 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wage (hk current$ million) Year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 13500 15828 18855 23443 25286.5 25852 28702.4 32077 34832 37404 40114 44092 46488 50497 wage (us$ million) 1989.900151 2240.520467 2547.215693 3009.370988 3122.799443 3109.516019 3354.645433 3660.273825 3861.565451 4030.256012 4215.906012 4561.669232 4703.505532 4921.376582 225 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essays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordination Appendix D-3: Data-US Year (1990 price) 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 GDP(billion of US$) 4433.112155 4255.104181 4308.117356 4216.481326 4393.373582 4682.209477 4827.277927 5007.946992 5169.195402 5348.287293 5532.982086 5522.2 5492.226488 5605.400372 5929.566004 6220.723104 6346.912521 6511 6754.109032 7043.429487 7275.196232 7496.507213 Exports 401.3258082 432.1045298 419.684287 365.8913295 346.6555179 355.238509 341.6821702 367.9687118 406.3218391 478.6740331 535.3003161 557 577.2552783 594.1340782 594.755877 639.4179894 702.058319 728.5 787.6322213 774.0384615 776.9230769 837.4335611 G I 841.5070062 840.5907269 844.3938735 868.6365748 885.9120026 925.0531449 996.9880032 1038.648254 1059.08046 1063.535912 1027.608008 1043.2 1054.990403 1047.765363 1166.726944 1170.987654 1176.672384 1184.916667 1205.044752 1234.695513 1281.397174 1321.943812 226 818.301704 692.698751 740.1548066 605.4872057 658.0423769 841.7116263 781.1439874 783.45183 804.0229885 824.0883978 876.9230769 799.5 707.1017274 736.7783985 787.6130199 967.5485009 980.8747856 1035.083333 1125.874695 1241.907051 1284.77237 1342.0653 C 2818.274961 2746.38411 2749.700233 2775.928041 2922.840946 3055.352866 3193.325366 3331.367221 3459.08046 3578.121547 3712.434141 3748.4 3748.944338 3851.862197 4027.21519 4159.082892 4261.578045 4364.583333 4495.036615 4688.221154 4905.965463 5108.883827 essays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordination essays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordinationessays.on.income.inequality.exchange.rate.and.policy.coordination Year (1990 price) 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Imports 446.4772102 456.6739363 445.8158438 399.5971901 419.9461513 489.3643013 485.7401346 525.3973969 572.0689655 597.5690608 619.2834563 625.9 596.0652591 622.3463687 651.4466546 716.1375661 774.271012 802.5833333 859.4792514 895.4326923 973.7833595 1113.819286 Interest Rate 11.22 13.07 15.91 12.35 9.09 10.37 8.05 6.52 6.86 7.73 9.09 8.16 5.84 3.68 3.17 4.63 5.92 5.39 5.62 5.47 5.33 6.46 m2 (b.od) 1501.8 1635.5 1798.7 1959.6 2194 2378.3 2580.5 2814.7 2933.9 3089.8 3245.1 3357 3472.7 3533.6 3606.1 3520.6 3665.8 3836.5 4053.2 4408.2 4677.3 4973.7 227 US Cpi Acc (ifs) 55.59074334 63.08658697 69.64759202 73.87439334 76.27168365 79.55218617 82.32797159 83.97453102 87 90.5 94.9 100 104.2 107.4 110.6 113.4 116.6 120 122.9 124.8 127.4 131.7 US Cpi percent (ifs) 11.30363036 13.48397806 10.4 6.06884058 3.245089667 4.301075269 3.489263526 3.602841176 4.022988506 4.861878453 5.374077977 4.2 3.071017274 2.979515829 2.53164557 2.821869489 2.915951973 2.416666667 1.545972335 2.083333333 3.4 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