China and global rebalancing: A two-country approach

Bénassy‐Quéré, Agnès; Carton, Benjamin; Gauvin, Ludovic

doi:10.1016/j.chieco.2013.04.005

Cited by 11 publications

(12 citation statements)

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“…These explanations add to the existing literature explaining the high household saving rate. Indeed, a large part of the literature states that an improvement in the quality of social insurance and pension system would significantly reduce household savings (Chamon and Prasad, 2010;Bénassy-Quéré et al, 2013;Chamon et al, 2013). Then, two other points are crucial:…”

Section: Literature Reviewmentioning

confidence: 99%

“…3 However, to keep a simple model, some determinants of household savings are not considered (for example, the bad quality of social insurance and pension system (Chamon and Prasad, 2010;Bénassy-Quéré et al, 2013;Chamon et al, 2013), demographic determinants (Modigliani and Cao, 2004;Wei and Zhang, 2011;Choukhmane et al, 2013, etc. ), the rise in housing prices (Chamon and Prasad, 2010;Bussiere et al, 2013), among others).…”

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Transition and capital misallocation: the Chinese case

Cubizol

2018

Journal of International Money and Finance

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Abstract:This paper demonstrates that the allocation of household savings to State-Owned Enterprises (SOEs) in China, and not to the increasing share of private firms, explains both the patterns of capital flows (FDI entries and the accumulation of foreign assets) and the drop in the consumption share during China's transition. The contribution is to explain these two elements in a dynamic general equilibrium model with TFP growth that differentiates FDI and foreign assets. In addition to other frictions, financial intermediation and SOEs have the crucial role by misdirecting household savings. It modifies firms' labor and capital intensiveness, and creates shifts in savings accumulation and capital flows. Moreover, the increasing share of credit-constrained private firms hinders wage growth, and returns on household savings are low to finance SOEs; these two elements reduce the consumption share. With a calibration adapted to the Chinese economy and deterministic shocks, the model also matches to a large extent the data for a variety of stylized facts over the last 30 years. Keywords:China's transition, foreign assets, FDI, consumption, global imbalances, factor market distortions JEL codes: and capital flows. Moreover, the increasing share of credit-constrained private firms hinders wage growth, and returns on household savings are low to finance SOEs; these two elements reduce the consumption share. With a calibration adapted to the Chinese economy and deterministic shocks, the model also matches to a large extent the data for a variety of stylized facts over the last 30 years. JEL: E20, F21, F32, O40, P20, P30.

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Section: Literature Reviewmentioning

confidence: 99%

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confidence: 99%

Transition and capital misallocation: the Chinese case

Cubizol

2018

Journal of International Money and Finance

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“…Bénassy‐Quéré et al . () focus on the effects of Chinese rebalancing on global rebalancing, but they also maintain that it is the interaction among the exchange rate regime, capital controls, reserve accumulation and other structural changes that matters most. For instance, they find that ‘a fall in China's saving rate would contribute to global rebalancing whatever the exchange rate regime, provided international capital flows do react to interest rate differentials’ and that ‘a monetary reform in itself is unable to rebalance the Chinese economy unless it is accompanied by a shift in government policy concerning net foreign asset accumulation’ (p. 3).…”

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confidence: 99%

Modelling the Transition Towards the Renminbi's Full Convertibility: Implications for China's Growth

Bonatti

Fracasso

2016

Bulletin of Econ Res

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There is a widespread consensus that China needs to rebalance its export-driven growth paradigm towards a more consumption-based one and that such process is to be accompanied by the transition towards the renminbi's full convertibility. However, the Chinese authorities have so far acted with great caution because this transition cannot but accelerate the slowdown of China's growth which will likely occur because of other structural factors. We address these issues by means of a twocountry two-stage (before and after the renminbi's full convertibility) model, which reproduces some qualitative features of China's growth pattern and its relationship with the United States. We analyse the extent to which altering the Chinese exchange rate regime, as well as other policies affecting sensitive social and economic issues, may impact on the short-, medium-and long-term evolution of the Chinese economy. The paper shows that by lifting the controls on the capital account and letting the currency float, the Chinese authorities will renounce those policy instruments for controlling the allocation of the national resources and the dynamics of China's economy.

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“…As for preferences, the elasticity of substitution across domestic goods is set at 7 (close to the calibration of Funke et al, 2015, and as in Rotemberg andWoodford, 1997, andBénassy-Quéré et al, 2013), the elasticity of substitution between domestic and foreign goods is fixed at 1.5 (as in Backus et al, 1994, andAuray et al, 2011), and the share of imports in China's consumption is equal to 0.2 (Bénassy-Quéré et al, 2013). The households' intertemporal elasticity of substitution is equal to that of Funke et al (2015), that is, 1.…”

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confidence: 99%

“…Figure 7: Taxes on the consumptions of domestic and foreign goods Regarding nominal rigidities, we set the price rigidity parameter η at 0.55 in China for the benchmark calibration; this value goes up to 0.65 during certain reforms (which is close to Bénassy-Quéré et al, 2013, where η = 0.67 in China). As for preferences, the elasticity of substitution across domestic goods is set at 7 (close to the calibration of Funke et al, 2015, and as in Rotemberg andWoodford, 1997, andBénassy-Quéré et al, 2013), the elasticity of substitution between domestic and foreign goods is fixed at 1.5 (as in Backus et al, 1994, andAuray et al, 2011), and the share of imports in China's consumption is equal to 0.2 (Bénassy-Quéré et al, 2013).…”

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confidence: 99%

Rebalancing in China: A Taxation Approach

Cubizol

2018

SSRN Journal

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Abstract:The rebalancing of the Chinese economy is analyzed through a heterogeneous taxation of various types of firms. Based on a two-country dynamic general equilibrium model, the paper applies tax reforms to raise consumption, reduce some firms' overinvestment (overcapacities) and maintain a high level of welfare. To rebalance consumption and investment, taxation may allow reallocating a part of the labor force to firms that are not overinvesting. Moreover, the correction of distortions in production factor costs (capital and labor) is necessary during certain reforms applied in the model; that is, on the one hand, higher credit costs for firms that face soft budget constraints (via financial transactions taxes) and, on the other hand, a catch-up of foreign firms' wages by domestic firms (via business taxes and social security contributions). These tax reforms bring welfare bene_ts to households and stabilize the welfare reaction to productivity shocks. Another interesting result is that in this framework, the rebalancing of the domestic demand in China does not require the readjustment of the external financial position. Indeed, the aggregate savings rate remains high and the supply of domestic assets is reduced. Finally, a second theoretical framework proposes a heterogeneous taxation of consumption across home and foreign goods to enhance consumption. Keywords:The Chinese economy, tax reforms, financial intermediation, consumption, investment, welfare, foreign assets The rebalancing of the Chinese economy is analyzed through a heterogeneous taxation of various types of firms. Based on a two-country dynamic general equilibrium model, the paper applies tax reforms to raise consumption, reduce some firms' overinvestment (overcapacities) and maintain a high level of welfare.To rebalance consumption and investment, taxation may allow reallocating a part of the labor force to firms that are not overinvesting (via business taxes and social security contributions). Moreover, the correction of distortions in production factor costs (capital and labor) is necessary during certain reforms applied in the model; that is, on the one hand, higher credit costs for firms that face soft budget constraints (via financial transactions taxes) and, on the other hand, a catch-up of foreign firms' wages by domestic firms (via social security contributions).These tax reforms bring welfare benefits to households and stabilize the welfare reaction to productivity shocks. Another interesting result is that in this framework, the rebalancing of the domestic demand in China does not require the readjustment of the external financial position. Indeed, the aggregate savings rate remains high and the supply of domestic assets is reduced. Finally, another model proposes a heterogeneous taxation of consumption across home and foreign goods to enhance consumption.

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China and global rebalancing: A two-country approach

Cited by 11 publications

References 23 publications

Transition and capital misallocation: the Chinese case

Transition and capital misallocation: the Chinese case

Modelling the Transition Towards the Renminbi's Full Convertibility: Implications for China's Growth

Rebalancing in China: A Taxation Approach

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