The Effects of a Nominal Renminbi Appreciation: A Heterogeneous Agent Approach
Abstract: Recent decades have seen the development of significant asymmetries in the global balance of payments, which many critics argue have incited crises and contributed to growing financial instability. Often cited as a contributing factor to these asymmetries has been the artificial suppression of the value of Chinese currency, especially in the first decade of the 21st century. In this paper, we investigate the impact of a nominal appreciation of the Chinese Renminbi (RMB) on the current account position of China vis-a-vis the US, as well as household-level inequality in both countries. To accomplish this, we adapt the HANK (heterogeneous agent New Keynesian) class of models developed by Kaplan et al. (2018) to a two-country world à la Devereux and Genberg (2006). This framework allows us to consider the distributional impacts of the currency shock, and produces a much richer array of transmission mechanisms arising from an enhanced role for general equilibrium effects. We find that a one-time, permanent appreciation of the Renminbi would lead to a temporary improvement in the current account from the perspective of the US, as well as a permanent decline in the overall ratio of foreign bond holdings. We also determine that this can be achieved without welfare losses on the part of Chinese households; indeed, the currency shock leads to a moderate decline in both wealth and income inequality.
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