Essays on income inequality, exchange rate, and policy coordination
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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 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.