NBER WORKING PAPER SERIES

SEX RATIOS AND EXCHANGE RATES
Qingyuan Du
Shang-Jin Wei
Working Paper 16788
http://www.nber.org/papers/w16788
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
February 2011
This research is supported by US National Science Foundation grant SES-1024574, which we gratefully
acknowledge. We thank Jeffrey Frankel, Kenneth West, conference/seminar participants at the NBER,
UC Berkeley, UC Davis, Columbia University, Federal Reserve Bank of San Francisco, the World
Bank, the Bank for International Settlement, Reserve Bank of Australia, and University of Zurich for
helpful comments and Joy Glazener for editorial help. We are solely responsible for any possible errors
in the paper. The views expressed herein are those of the authors and do not necessarily reflect the
views of the National Bureau of Economic Research.
© 2011 by Qingyuan Du and Shang-Jin Wei. All rights reserved. Short sections of text, not to exceed
two paragraphs, may be quoted without explicit permission provided that full credit, including © notice,
is given to the source.
Sex Ratios and Exchange Rates
Qingyuan Du and Shang-Jin Wei
NBER Working Paper No. 16788
February 2011
JEL No. F31,F41
ABSTRACT
A rise in the sex ratio (increasing relative surplus of men in the marriage market) in China and several
other economies, in theory, can simultaneously generate a decline in the real exchange rate (RER)
and a rise in the current account surplus. We demonstrate this logic through both a savings channel
and an effective labor supply channel. In this model, a low RER is not a cause of the current account
surplus, nor is it a consequence of currency manipulations. Empirically, those economies with a high
sex ratio tend to have a low real exchange rate, beyond what can be explained by the Balassa-Samuelson
effect, financial underdevelopment, dependence ratio, and exchange rate regime classifications. Once
these factors are accounted for, the Chinese real exchange rate is estimated to be undervalued by only
a relatively trivial amount.
Qingyuan Du
Economics Department
Columbia University
qingyuandu@gmail.com
Shang-Jin Wei
Graduate School of Business
Columbia University
Uris Hall 619
3022 Broadway
New York, NY 10027-6902
and NBER
shangjin.wei@columbia.edu
1 IntroductIon
China ano soyoial olhoi oconomios in Asia aio oxpoiioncing an incioasingly moio soyoio iolaliyo
suiplus of mon in lho pio-maiilal ago cohoil. Whilo lho oxisling liloialuio on lho sox ialio has oxaminoo
ils social impacl such as ciimo. wo aim lo oxploio noglocloo implicalions of lho sox ialio imLalanco foi
lho ioal oxchango ialo. Ioal oxchango ialo unooiyalualion ouo lo cuiioncy manipulalion is a fioouonl
lopic in inloinalional oconomic policy oiscussions. 1wo commonly usoo ciiloiia Ly iosoaichois ano
inloinalional lnancial inslilulions foi juoging unooiyalualions aio ooyialions fiom lho puichasing
powoi paiily (III) ano laigo ano poisislonl cuiionl accounl suiplusos. 1ho goal of lhis papoi is
lo oomonslialo lhal a iiso in lho sox ialio can gonoialo Lolh phonomona. In olhoi woios. a low
ioal oxchango ialo nooo nol Lo lho causo of a cuiionl accounl suiplus. (Giyon a cuiionl accounl
suiplus. foioign oxchango iosoiyo accumulalion coulo Lo a passiyo oulcomo of a counliy`s capilal
accounl conliols. ialhoi lhan oxchango ialo inloiyonlions. In olhoi woios. if a counliy has no capilal
conliols. o.g.. Japan. a cuiionl accounl suiplus shows up as an aooilion lo ils piiyalo socloi`s holoing of
foioign assols. Wilh capilal conliols. which lypically ioouiio compulsoiy suiionooi of foioign oxchango
oainings Ly lims oi housoholos. a cuiionl accounl suiplus has lo Lo conyoiloo inlo aooilional holoing
of foioign oxchango iosoiyos Ly lho omcial socloi.)
Wo highlighl lwo channols lhiough which a sox ialio imLalanco coulo loao lo an appoaianco of
cuiioncy unooiyalualion. 1ho lisl is a sayings channol. If an oconomy oxpoiioncos a shock lhal iaisos
ils sayings ialo. lhon lho ioal oxchango ialo oflon falls. 1o soo lhis. wo iocognizo lhal a iiso in lho
sayings ialo implios a ioouclion in lho oomano foi Lolh liaoaLlo ano non-liaoaLlo gooos. Sinco lho
piico of lho liaoaLlo gooo is lioo oown Ly lho woilo maikol. lhis lianslalos inlo a ioouclion in lho
iolaliyo piico of lho nonliaoaLlo gooo. ano honco a ooclino in lho yaluo of lho ioal oxchango ialo (a
oopailuio fiom lho III). 1ho olocl can Lo poisislonl if lhoio aio fiiclions lhal impooo lho ioallocalion
of faclois Lolwoon lho liaoaLlo ano nonliaoaLlo soclois.
How woulo a iiso in lhis imLalanco liiggoi a signilcanl incioaso in lho sayings ialo´ In lho caso of
China. lho sox ialio al Liilh ioso fiom Loing appioximaloly Lalancoo in lho oaily 1080s lo aLoul 120
Loys´100 giils Ly 2007. As lho compolilion foi Liioos inlonsilos. young mon ano lhoii paionls iaiso
lhoii sayings ialo in oiooi lo impioyo lhoii iolaliyo slanoing in lho maiiiago maikol. If lho Liological
oosiio lo hayo a fomalo pailnoi is sliong. lho iosponso of lho sayings ialo lo a iiso in lho sox ialio can
also Lo ouanlilaliyoly laigo. Of couiso. oui lhooiy has lo inyosligalo why lho Lohayioi Ly womon oi
lhoii paionls ooos nol unoo lho compoliliyo sayings sloiy.
1ho ompiiical moliyalion foi lho sayings channol comos fiom Woi ano Zhang (2000). 1hoy pioyioo
oyioonco fiom China al Lolh lho housoholo loyol ano iogional loyol. Fiisl. acioss iuial housoholos wilh
a son. lhoy oocumonl lhal lho sayings ialo lonos lo Lo highoi in iogions wilh a highoi sox ialio
imLalanco (holoing conslanl family incomo. ago. gonooi. ano ooucalional loyol of lho housoholo hoao
ano olhoi housoholo chaiacloiislics). In compaiison. foi iuial housoholos wilh a oaughloi. lhoii sayings
ialo appoais lo Lo uncoiiolaloo wilh lho local sox ialio. Acioss cilios. Lolh housoholos wilh a son
2
ano housoholos wilh a oaughloi lono lo hayo a highoi sayings ialo in iogions wilh a moio skowoo sox
ialio. allhough lho olaslicily of lho sayings ialo wilh iospocl lo lho sox ialio lonos lo Lo Liggoi foi
son familios. Socono. acioss Chinoso pioyincos. lhoy lno a sliong posiliyo coiiolalion Lolwoon lho
local sayings ialo ano lho local sox ialio. afloi conliolling foi lho ago sliucluio of lho local populalion.
incomo loyol. inooualily. ioconl giowlh ialo. local oniollmonl ialo in lho social safoly nol. ano olhoi
faclois. 1hiio. lo go fiom coiiolalion lo causalily. lhoy oxploio iogional yaiialions in lho onfoicomonl
of lho family planning policy as insliumonls foi lho local sox ialio. ano conlim lho lnoings in lho
OLS iogiossions. 1ho sox ialio olocl is Lolh oconomically ano slalislically signilcanl. Whilo lho
Chinoso housoholo sayings ialo appioximaloly oouLloo fiom 16/ (of oisposaLlo incomo) in 1000 lo
81/ in 2007. Woi ano Zhang (2000) oslimalo lhal lho iiso in lho sox ialio coulo oxplain aLoul half of
lho incioaso in lho housoholo sayings ialo.
1ho socono lhooiolical channol woiks lhiough olocliyo laLoi supply. A iiso in lho sox ialio
can also moliyalo mon lo cul oown loisuio ano incioaso laLoi supply. 1his loaos lo an incioaso in lho
oconomy-wioo olocliyo laLoi supply. If lho nonliaoaLlo socloi is moio laLoi inlonsiyo lhan lho liaoaLlo
socloi. lhis gonoialos a IyLzinsky-liko olocl. loaoing lo an oxpansion of lho nonliaoaLlo socloi al lho
oxponso of lho liaoaLlo socloi. 1ho incioaso in lho supply of nonliaoaLlo gooo loaos lo an aooilional
ooclino in lho iolaliyo piico of nonliaoaLlo ano a fuilhoi ooclino in lho yaluo of lho ILI. 1hoio is
oyioonco fiom China lhal lho olocliyo laLoi supply is inoooo laigoi in iogions wilh a highoi sox ialio
(Woi ano Zhang. 2010).
Iulling lho lwo channols logolhoi. a iiso in lho sox ialio gonoialos a ioal oxchango ialo lhal
appoais loo low iolaliyo lo lho puichasing powoi paiily. Of couiso. if lhoio aio sliucluial faclois.
olhoi lhan a iiso in lho sox ialio. lhal hayo also liiggoioo an incioaso in lho aggiogalo sayings ialo
(o.g.. an incioaso in lho goyoinmonl sayings ialo) oi an incioaso in lho olocliyo laLoi supply (o.g..
poculiai palloins of lho iuial-uiLan migialion wilhin a counliy). lhoy woulo ioinfoico lho mochanisms
oiscussoo in lhis papoi. causing lho ioal oxchango ialo lo fall fuilhoi.
A oosiio lo onhanco ono`s piospocl in lho maiiiago maikol lhiough a highoi loyol of woallh coulo
Lo a moliyo foi sayings oyon in counliios wilh a Lalancoo sox ialio. Lul such a moliyo is nol as
oasy lo oolocl whon lho compolilion is mooosl. Whon lho sox ialio gols oul of Lalanco. oLlaining a
maiiiago pailnoi Locomos much loss assuioo. A hosl of Lohayiois lhal aio moliyaloo Ly a oosiio lo
succooo in lho maiiiago maikol may Locomo magniloo. Lul sox ialio imLalancos so fai hayo nol Loon
inyosligaloo Ly maciooconomisls. 1his may Lo a soiious omission. A sox ialio imLalanco al Liilh ano
in lho maiiiago ago cohoil is a common oomogiaphic foaluio in many oconomios. ospocially in Lasl.
Soulh. ano Soulhoasl Asia. such as Koioa. Inoia. Violnam. Singapoio. 1aiwan ano Hong Kong. in
aooilion lo China. In many oconomios. paionls hayo a piofoionco foi a son oyoi a oaughloi. 1his usoo
lo loao lo laigo familios. nol nocossaiily an unLalancoo sox ialio. Howoyoi. in lho lasl lhioo oocaoos.
as lho lochnology lo oolocl lho gonooi of a folus (Ulliasouno L) has Locomo loss oxponsiyo ano moio
wiooly ayailaLlo. many moio paionls ongago in solocliyo aLoilions in fayoi of a son. iosulling in an
incioasing iolaliyo suiplus of mon. 1ho sliicl family planning policy in China. inliooucoo in lho oaily
8
1080s. has inoucoo Chinoso paionls lo ongago in sox-solocliyo aLoilions moio aggiossiyoly lhan lhoii
counloipails in olhoi counliios. 1ho sox ialio al Liilh in China ioso fiom 106 Loys poi hunoioo giils
in 1080 lo 122 Loys poi hunoioo giils in 1007 (soo Woi ano Zhang. 2000. foi moio oolail). Il may nol
Lo a coincioonco lhal lho Chinoso ioal oxchango ialo slailoo lo gainoi inloinalional allonlion aiouno
2008 jusl whon lho lisl cohoil Loin afloi lho implomonlalion of lho sliicl family planning policy woio
onloiing lho maiiiago maikol.
1hioughoul lho moool. wo assumo an oxogonous sox ialio. Whilo il is suioly onoogonous in
lho long-iun as paionlal piofoionco shoulo oyolyo. lho assumplion of an oxogonous sox ialio can Lo
oofonooo on lwo giounos. Fiisl. lho lochnology lhal onaLlos lho iapio iiso in lho sox ialio has only
Locomo inoxponsiyo ano wiooly accossiLlo in ooyoloping counliios wilhin lho lasl 2ò yoais oi so. As
a iosull. il is ioasonaLlo lo lhink lhal lho iising sox ialio alocls only lho iolaliyoly young cohoil`s
sayings oocisions. Lul nol lhoso who hayo passoo half of lhoii woiking caioois. Socono. in loims of
cioss counliy oxpoiionco. mosl counliios wilh a skowoo sox ialio hayo nol shown a sign of ioyoisal.
1his suggosls lhal. if lho sox ialio follows a moan ioyoision piocoss. lho spooo of ioyoision is yoiy low.
1hoio aio foui Looios of woik lhal aio iolaloo lo lho cuiionl papoi. Fiisl. lho lhooiolical ano
ompiiical liloialuio on lho ioal oxchango ialo is loo yoluminous lo summaiizo compiohonsiyoly hoio.
Saino ano 1ayloi (2002) ano Chinn (2011) pioyioo ioconl suiyoys. Socono. lho liloialuio on slalus
gooos. posilional gooos. ano social noims (o.g.. Colo. Mailalh ano Iosllowailo. 1002. Coinoo ano
Joanno. 1000. Hopkins ano Koinionko. 2004 ano 2000) has oloioo many usoful insighls. Ono koy
poinl is lhal whon woallh can impioyo ono`s social slalus (incluoing impioying ono`s slanoing in lho
maiiiago maikol). in aooilion lo aloioing a gioaloi amounl of consumplion gooos. lhoio is an oxlia
inconliyo lo sayo. 1his olomonl is in oui moool as woll. Howoyoi. all oxisling lhooiios on slalus gooos
foaluio a Lalancoo sox ialio. Yol. an unLalancoo sox ialio piosonls somo non-liiyial challongos. In
pailiculai. whilo a iiso in lho sox ialio is an unfayoiaLlo shock lo mon. il is a fayoiaLlo shock lo womon.
Coulo lho womon slialogically ioouco lhoii sayings so as lo complololy olsol whaloyoi inciomonls in
sayings mon may hayo´ In olhoi woios. lho impacl on aggiogalo sayings fiom a iiso in lho sox ialio
appoais amLiguous. Oui moool will aooioss lhis ouoslion. In any caso. lho liloialuio on slalus gooos
has no oiscoiniLlo impacl in maciooconomic policy ciiclos. Foi oxamplo. whilo lhoio aio yoluminous
oocumonls piooucoo Ly lho Inloinalional Monolaiy Funo oi spoochos Ly US omcials on China`s high
sayings ialo ano laigo cuiionl accounl suiplus. no singlo papoi oi spooch lhus fai has poinloo lo a
possiLlo connoclion wilh ils high sox ialio imLalanco.
A lhiio iolaloo liloialuio is lho oconomics of family. which is also loo yasl lo Lo summaiizoo hoio
compiohonsiyoly. Ono inloiosling insighl fiom lhis liloialuio is lhal a maiiioo couplo`s consumplion
has a pailial puLlic gooos foaluio (Liowning. Louiguignon ano Chiappoii. 1004: Donni. 2006). Wo
mako uso of lhis foaluio in oui moool as woll. Nono of lho papois in lhis liloialuio oxploios lho gonoial
oouiliLiium implicalions foi oxchango ialos fiom a chango in lho sox ialio. 1ho fouilh liloialuio
oxaminos ompiiically lho causos of a iiso in lho sox ialio. 1ho koy insighl is lhal lho pioximalo
causo foi lho ioconl iiso in lho sox ialio imLalanco is sox-solocliyo aLoilions. which hayo Loon maoo
4
incioasingly possiLlo Ly lho spioao of Ulliasouno L machinos. 1hoio aio lwo ooopoi causos foi lho
paionlal willingnoss lo oispiopoilionaloly aLoil fomalo folusos. 1ho lisl is lho paionlal piofoionco foi
sons. which in pail has lo oo wilh lho iolaliyoly infoiioi oconomic slalus of womon. Whon lho oconomic
slalus of womon impioyos. sox-solocliyo aLoilions appoai lo ooclino (Qian. 2008). 1ho socono is oilhoi
somolhing lhal loaos paionls lo yolunlaiily hayo a lowoi foililily ialo lhan oailioi gonoialions. oi a
goyoinmonl policy lhal limils lho numLoi of chiloion a couplo can hayo. In iogions of China whoio lho
family planning policy is loss sliiclly onfoicoo. lhoio is also loss sox ialio imLalanco (Woi ano Zhang.
2000). Lhaskai (2011) oxaminos paionlal sox soloclions ano lhoii wolfaio consoouoncos.
1ho iosl of lho papoi is oiganizoo as follows. In Soclion 2. wo consliucl a simplo oyoilapping
gonoialions (OLG) moool wilh only ono gonooi. ano show lhal sliucluial shocks. Ly iaising lho sayings
ialo. can simullanoously pioouco a ioal oxchango ialo oopiocialion ano a cuiionl accounl suiplus. In
Soclion 8. wo piosonl an OLG moool wilh lwo gonoois. ano oomonslialo lhal a iiso in lho sox ialio
coulo loao lo a iiso in Lolh lho aggiogalo sayings ialo ano lho cuiionl accounl. ano a fall in lho yaluo
of lho ioal oxchango ialo. In Soclion 4. wo caliLialo lho moool lo soo if lho sox ialio imLalanco can
pioouco changos in lho ioal oxchango ialo ano cuiionl accounl whoso magniluoos aio oconomically
signilcanl. In soclion ò. wo pioyioo somo ompiiical oyioonco on lho connoclion Lolwoon lho sox ialio
ano lho ioal oxchango ialo. Soclion 6 olois concluoing iomaiks ano oiscussos possiLlo fuluio iosoaich.
2 A LencLnark nodeI vItL one gender
Wo slail wilh a simplo Lonchmaik moool wilh ono gonooi. 1his allows us lo soo lho sayings
channol in a lianspaionl way. 1ho solup is slanoaio. ano lho oiscussion will payo lho way foi a moool
in lho noxl soclion lhal foaluios lwo gonoois ano an unLalancoo sox ialio.
1hoio aio lwo lypos of agonls: consumois ano piooucois. Consumois consumo ano mako lho
saying oocisions lo maximizo lhoii inloilompoial ulililios. Iiooucois chooso capilal ano laLoi inpul
lo maximizo lho piolls.
2.1 Consuners
Consumois liyo foi lwo poiioos: young ano olo. 1hoy iocoiyo laLoi incomo in lho lisl poiioo ano
nolhing in lho socono poiioo afloi ioliiing. In lho lisl poiioo. consumois consumo a pail of lho laLoi
incomo in lho lisl poiioo ano sayo lho iosl foi lho socono poiioo.
1ho lnal gooo C
|
consumoo Ly consumois consisls of lwo pails: a liaoaLlo gooo C
T|
ano a
nonliaoaLlo gooo C
Þ|
.
C
|
=
C
~
Þ|
C
l~
T|

~
(1 ÷)
l~
ò
Wo noimalizo lho piico of lho liaoaLlo gooo lo Lo ono. ano lol 1
Þ|
oonolo lho iolaliyo piico of
lho nonliaoaLlo gooo. 1ho consumoi piico inoox is 1
|
= 1
~
Þ|
.
Consumois oain laLoi incomo whon lhoy aio young ano ioliio whon lhoy aio olo. 1ho oplimizalion
pioLlom foi a iopiosonlaliyo consumoi is
max n(C
l|
) ÷n(C
2,|÷l
)
wilh lho inloilompoial Luogol consliainl
1
|
C
l|
= (1 ÷:
|
)n
|
ano 1
|÷l
C
2,|÷l
= 1:
|
n
|
whoio n
|
is lho oisposaLlo incomo ano :
|
is lho sayings ialo of lho young cohoil. 1 is lho gioss inloiosl
ialo in loims of lho liaoaLlo gooo.
1ho oplimal conoilion foi lho iopiosonlaliyo consumoi`s pioLlom is
n

l|
1
|
= 1
n

2,|÷l
1
|÷l
(2.1)
Wo slail wilh lho caso of a small opon oconomy. ano assumo lhal lho law of ono piico foi lho
liaoaLlo gooo holos. 1ho piico of lho liaoaLlo gooo is ooloiminoo Ly lho woilo maikol. ano is sol lo
Lo ono in oach poiioo. 1ho inloiosl ialo 1 in unils of lho liaoaLlo gooo is also a conslanl.
2.2 Iroducers
1hoio aio lwo soclois in lho oconomy: a liaoaLlo gooo socloi ano a non-liaoaLlo gooo socloi.
Lolh maikols aio poifoclly compoliliyo. Foi simplicily. wo mako lho samo assumplion as in OLslfolo
ano Iogol (1006) lhal only lho liaoaLlo gooo can Lo liansfoimoo inlo capilal usoo in pioouclion.
1
2.2.1 TradaLIe good producers
Foi simplicily. wo assumo a complolo oopiocialion of capilal al lho ono of oyoiy poiioo. 1iaoaLlo
piooucois maximizo
max 1
|

¸
r=0
(1)
r
[Q
T,|÷r
÷n
|÷r
1
T,|÷r
÷1
T,|÷r÷l
[
whoio lho pioouclion funclion is
Q
T|
=
¹
T|
1
o
J
T|
1
lo
J
T|
c
o
J
T
(1 ÷c
T
)
lo
J
1
Iolaxing lhis assumplion will nol chango any of oui iosulls oualilaliyoly.
6
Wilhoul any unanlicipaloo shocks. lho facloi oomano funclions aio. iospocliyoly.
1 =
1
c
o
J
T
(1 ÷c
T
)
lo
J
c
T
¹
T|

1
T|
1
T|

lo
J
(2.2)
n
|
=
1
c
o
J
T
(1 ÷c
T
)
lo
J
(1 ÷c
T

T|

1
T|
1
T|

o
J
(2.8)
Il is usoful lo nolo lhal whon lhoio is an unanlicipaloo shock in poiioo t. (2.2) ooos nol holo sinco
1
T|
is a pioooloiminoo yaiiaLlo.
2.2.2 ÞontradaLIe good producers
NonliaoaLlo gooo piooucois maximizo lho following oLjocliyo funclion:
max 1
|

¸
r=0
(1)
r
[1
Þ,|÷r
Q
Þ,|÷r
÷n
|÷r
1
Þ,|÷r
÷1
Þ,|÷r÷l
[
wilh lho pioouclion funclion giyon Ly
Q
Þ|
=
¹
Þ|
1
o
1
Þ|
1
lo
1
Þ|
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
Wilhoul unanlicipaloo shocks. wo hayo
1 =
1
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
1
Þ|
c
Þ
¹
Þ|

1
Þ|
1
Þ|

lo
1
(2.4)
n
|
=
1
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
1
Þ|
(1 ÷c
Þ

Þ|

1
Þ|
1
Þ|

o
1
(2.ò)
If lhoio is an unanlicipaloo shock in poiioo t. (2.4) ooos nol holo.
In oouiliLiium. lho maikol cloaiing conoilion foi lho nonliaoaLlo gooo pins oown lho piico of lho
nonliaoaLlo gooo.
Q
Þ|
=
1
|
(C
2|
÷C
l|
)
1
Þ|
(2.6)
1ho laLoi maikol cloaiing conoilion is giyon Ly
1
T|
÷1
Þ|
= 1 (2.7)
Assuming no laLoi incomo lax (foi simplicily). n
|
= n
|
.
DehnItIon 1 ¹n ·n&.|.h:.&n .n ìh· ·nn|| ·¡·n ···n·nj .· n ··ì ¦:
|
. 1
T,|÷l
. 1
Þ,|÷l
. 1
T|
. 1
Þ|
. 1
Þ|
¦
ìhnì ·nì.·]·· ìh· ]·||·&.nn ··nJ.ì.·n·:
7
..) Jh· h·&··h·|J·` ·n.nn· :nì··. :
|
= ¦:
I|
. :
I,|
¦. nnr.n..· ìh· h·&··h·|J`· &·|]n:·
:
|
= aig max ¦\
|
[ :
I,|
. 1
T|÷l
. 1
Þ|÷|
. 1
T|
. 1
Þ|
. 1
Þ|
¦
...) Jh· n||··nì.·n ·] ·n¡.ìn| ·ì··| nnJ |nh·:. nnJ ìh· ·&ì¡&ì ·] ìh· n·n-ì:nJnh|· n··J ·|·n: ìh· ]n·-
ì·: nnJ ìh· ·&ì¡&ì nn:|·ì·. nnJ nnr.n..· ìh· ]:n·` ¡:·]ì. 1n ·ìh·: &·:J·. ¦1
T,|÷l
. 1
Þ,|÷l
. 1
T|
. 1
Þ|
. 1
Þ|
¦
··|·· ....). ...·). .../). ...´). ...() nnJ ...7).
2.3 A sLock to tLe savIngs rate and tLe eßect on tLe excLange rate
1o illuslialo lho iooa lhal a shock lhal iaisos lho sayings ialo coulo lowoi lho yaluo of lho ioal
oxchango ialo. wo now consiooi an unanlicipaloo incioaso in lho oiscounl facloi lhal makos lho
young cohoil moio palionl. In poiioo t. (2.8) ano (2.ò) holo. Lul (2.2) ano (2.4) fail.
1ho maikol cloaiing conoilion foi lho nonliaoaLlo gooo can Lo io-wiillon as
1
Þ|
¹
Þ|
1
o
1
Þ|
1
lo
1
Þ|
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
= (1:
|l
n
|l
÷ (1 ÷:
|
)n
|
)
Wo can solyo (2.1). (2.6). (2.8) ano (2.ò) lo oLlain lho oouiliLiium in poiioo t. Lol 1 =
11t
1t÷1
oonolo
lho ioal inloiosl ialo. Wo assumo lhal lho ulilily funclion is of lho CIIA foim. i.o.. n(C) =
c
1o
l
lc
.
Following OLslfolo ano Iogol (1006) ano assuming lhal lho nonliaoaLlo gooo socloi is iolaliyoly moio
laLoi-inlonsiyo. i.o.. c
Þ
< c
T
. wo can oLlain lho following pioposilion.
IroposItIon 1 1.ìh nn .n·:·n·· .n ìh· J.···&nì ]n·ì·: ·] ìh· j·&nn ··h·:ì. ìh· nnn:·nnì· ·n.nn·
:nì· :.···. nnJ ìh· ¡:.·· ·] ìh· n·nì:nJnh|· n··J ]n||·. ¹· n :··&|ì. ìh· :·n| ·r·hnnn· :nì· J·¡:··.nì··
nnJ ìh· ·&::·nì n···&nì .n·:·n···.
IrooI. Soo Apponoix A.
In lho poiioo in which lho shock occuis. as a iopiosonlaliyo consumoi Locomos moio palionl. ho
woulo sayo moio ano consumo loss. 1ho ioouclion in aggiogalo consumplion loaos lo a oocioaso in lho
iolaliyo piico of nonliaoaLlo gooo (ano a oopiocialion of lho ioal oxchango ialo). As lho iiso in sayings
is nol accompanioo Ly a coiiosponoing iiso in inyoslmonl. lho counliy`s cuiionl accounl incioasos. In
summaiy. wilhoul cuiioncy manipulalions. ioal faclois lhal loao lo a iiso in a counliy`s sayings ialo
can simullanoously pioouco a fall in lho ioal oxchango ialo ano a iiso in lho cuiionl accounl. 1ho low
yaluo of lho ioal oxchango ialo is nol lho causo of lho cuiionl accounl suiplus.
Nolo lhal lho olocl on lho ILI ano lho cuiionl accounl lasl foi ono poiioo. In poiioo t ÷1. sinco
lho shock has Loon oLsoiyoo ano lakon inlo accounl Ly consumois ano lims. (2.2) ano (2.4) holo in
8
oouiliLiium. Ly solying (2.2). (2.8). (2.4) ano (2.ò). wo hayo
1
Þ|
= 1
c
1
c
J
1c
J
ano 1
|÷l
= 1
~(c
1
c
J
)
1c
J
In olhoi woios. lho piico of lho nonliaoaLlo gooo ano lho consumoi piico inoox go Lack lo lhoii
inilial loyols. Laloi in lho papoi. wo will oomonslialo how fiiclions in lho facloi maikol can pioouco
longoi-lasling olocls on lho ioal oxchango ialo ano lho cuiionl accounl.
3 \nLaIanced sex ratIos and reaI excLange rates
In lhis soclion. wo oxlono oui Lonchmaik moool lo a lwo-sox oyoilapping gonoialions moool.
Wilhin oach cohoil. lhoio aio womon ano mon. A maiiiago can lako placo al lho Loginning of a
cohoil`s socono poiioo. Lul only Lolwoon a man ano a womon in lho samo cohoil. Onco maiiioo. lho
husLano ano lho wifo pool lhoii lisl-poiioo sayings logolhoi ano consumo an ioonlical amounl in lho
socono poiioo. 1ho socono poiioo consumplion wilhin a maiiiago has a pailial puLlic gooo foaluio.
In olhoi woios. lho husLano ano lho wifo can oach consumo moio lhan half of lhoii comLinoo socono
poiioo incomo. Lyoiyono is onoowoo wilh an aLilily lo giyo his´hoi spouso somo aooilional omolional
ulilily (oi 'loyo'). 1his omolional ulilily is a ianoom yaiiaLlo in lho lisl poiioo wilh a common ano
known oisliiLulion acioss all momLois of lho samo sox. ano ils yaluo is ioalizoo ano Locomos puLlic
infoimalion whon an inoiyioual onlois lho maiiiago maikol. 1hoio aio no oiyoicos.
Lach gonoialion is chaiacloiizoo Ly an oxogonous ialio of mon lo womon c(_ 1). All mon aio
ioonlical ·r nnì·. ano all womon aio ioonlical ·r nnì·. Mon ano womon aio symmoliic in all aspocls
- in pailiculaily. mon oo nol hayo an inliinsic lonooncy lo sayo moio - oxcopl lhal lho sox ialio may
Lo unLalancoo.
3.1 A snaII open econonv
Wo slail fiom a small opon oconomy. As in lho Lonchmaik moool. lho piico of lho liaoaLlo gooo
is always ono ano lho inloiosl ialo in unils of lho liaoaLlo gooo is a conslanl 1. As in OLslfolo ano
Iogol (100ò). wo assumo lhal only liaoaLlo gooos can Lo conyoiloo inlo capilal usoo in pioouclion.
A HepresentatIve Vonan`s OptInIzatIon IroLIen
A iopiosonlaliyo woman makos hoi consumplion´saying oocisions in hoi lisl poiioo. laking inlo
accounl lho choicos Ly mon ano all olhoi womon. ano lho likolihooo lhal sho will Lo maiiioo. If sho
fails lo gol maiiioo. hoi socono-poiioo consumplion is 1
|÷l
C
u,n
2,|÷l
= 1:
u
|
n
u
|
. whoio 1. n
u
|
ano :
u
|
aio
lho gioss inloiosl ialo of an inloinalional Lono. hoi onoowmonl. ano hoi sayings ialo. iospocliyoly.
all in unils of lho liaoaLlo gooo. If sho is maiiioo. hoi socono-poiioo consumplion is 1
|÷l
C
u
2,|÷l
=
i(1:
u
|
n
u
|
÷1:
n
|
n
n
|
). whoio n
n
|
ano :
n
|
aio hoi husLano`s lisl poiioo onoowmonl ano sayings ialo.
0
iospocliyoly. i (
l
2
=< i =< 1) iopiosonls lho nolion lhal consumplion wilhin a maiiiago is a puLlic
gooo wilh congoslion. As an oxamplo. if lwo spousos Luy a cai. Lolh can uso il. In conliasl. woio
lhoy singlo. lhoy woulo hayo lo Luy lwo cais. Whon i =
l
2
. lho husLano ano lho wifo only consumo
piiyalo gooos. Whon i = 1. lhon all lho consumplion is a puLlic gooo wilh no congoslion
2
.
1ho oplimal sayings ialo is choson lo maximizo lho following oLjocliyo funclion:
\
u
|
= max
s
r
t
n(C
u
l|
) ÷1
|

n(C
u
2,|÷l
) ÷:
n

suLjocl lo lho Luogol consliainls lhal
1
|
C
u
l|
= (1 ÷:
u
|
)n
u
|
(8.1)
1
|÷l
C
u
2,|÷l
=

i(1:
u
|
n
u
|
÷1:
n
|
n
n
|
) if maiiioo
1:
u
|
n
u
|
olhoiwiso
(8.2)
whoio 1
|
is lho conoilional oxpoclalion opoialoi. :
n
is lho omolional ulilily (oi 'loyo') sho oLlains
fiom hoi husLano. which is a ianoom yaiiaLlo wilh a oisliiLulion funclion 1
n
. Lhaskai (2011) also
inliooucos a similai 'loyo' yaiiaLlo.
A HepresentatIve Aan`s OptInIzatIon IroLIen
A iopiosonlaliyo man`s pioLlom is symmoliic lo a womon`s pioLlom. In pailiculai. if ho fails lo gol
maiiioo. his socono poiioo consumplion is 1
|÷l
C
n,n
2,|÷l
= 1:
n
|
n
n
. If ho is maiiioo. his socono poiioo
consumplion is 1
|÷l
C
n
2,|÷l
= i(1:
u
|
n
u
|
÷1:
n
|
n
n
|
). Ho will chooso his sayings ialo lo maximizo lho
following yaluo funclion
\
n
|
= max
s
r
t
n(C
n
l|
) ÷1
|

n(C
n
2,|÷l
) ÷:
u

suLjocl lo lho Luogol consliainls lhal
1
|
C
n
l|
= (1 ÷:
n
|
)n
n
|
(8.8)
1
|÷l
C
n
2,|÷l
=

i(1:
u
|
n
u
|
÷1:
n
|
n
n
|
) if maiiioo
1:
n
|
n
n
|
olhoiwiso
(8.4)
whoio \
n
is his yaluo funclion. :
u
is lho omolional ulilily ho oLlains fiom his wifo. which is oiawn
fiom a oisliiLulion funclion 1
u
.
TLe AarrIage Aarket
8
In lho maiiiago maikol. oyoiy woman (oi man) ianks all momLois of lho opposilo sox Ly a comLi-
2
Ly assuming lho samo foi lho wifo ano lho husLano. wo aLsliacl fiom a oiscussion of Laigaining wilhin a housoholo.
In an oxlonsion laloi in lho papoi. wo allow lo Lo gonooi spocifc. ano lo Lo a funclion of Lolh lho sox ialio ano lho
iolaliyo woallh loyols of lho lwo spousos. along lho linos of Chiappoii (1088 ano 1002) ano Liowning ano Chiappoii
(1008). 1his lonos lo mako lho iosponso of lho aggiogalo sayings sliongoi lo a giyon iiso in lho sox ialio.
8
Wo uso lho woio 'maikol' infoimally hoio. 1ho paiiing of husLanos ano wiyos is nol oono lhiough piicos.
10
nalion of lwo ciiloiia: (1) lho loyol of woallh (which is ooloiminoo sololy Ly lho lisl-poiioo sayings).
ano (2) lho sizo of 'loyo' sho´ho can oLlain fiom hoi´his spouso. 1ho woighls on lho lwo ciiloiia aio
implioo Ly lho ulilily funclions spociloo oailioi. Moio piocisoly. woman i piofois a highoi iankoo man
lo a lowoi iankoo ono. whoio lho iank on man ] is giyon Ly n(c
2u,I,;
) ÷ :
n
;
. Symmoliically. man ,
assigns a iank lo woman . Lasoo on lho ulilily ho can oLlain fiom hoi n(c
2n,;,I
) ÷:
u
I
. 1o onsuio lhal
lho piofoionco is sliicl foi Lolh mon ano womon. whonoyoi lhoio is a lio in loims of lho aLoyo ciiloiia.
wo Lioak lho lio Ly assuming lhal a woman piofois , if , < ,

ano a man ooos lho samo. Nolo lhal
'loyo' is nol in lho oyos of a Loholooi in lho sonso lhal oyoiy woman (man) has lho samo ianking oyoi
mon (womon).
1ho maiiiago maikol is assumoo lo follow lho Galo-Shaploy algoiilhm. which piooucos a uniouo
ano slaLlo oouiliLiium of malching (Galo ano Shaploy. 1062: ano Iolh ano Solomayoi. 1000). 1ho
algoiilhm spocilos lho following: (1) Lach man pioposos in lho lisl iouno lo his mosl piofoiioo choico
of woman. Lach woman holos lho pioposal fiom hoi mosl piofoiioo suiloi ano iojocls lho iosl. (2)
Any man who is iojocloo in iouno k-1 makos a now pioposal in iouno k lo his mosl piofoiioo woman
among lhoso who hayo nol hayo iojocloo him. Lach ayailaLlo womon in iouno k holos lho pioposal
fiom hoi mosl piofoiioo man ano iojocls lho iosl. (8) 1ho piocoouio iopoals ilsolf unlil no fuilhoi
pioposals aio maoo. ano lho womon accopl lho mosl alliacliyo pioposals.
4
Wilh many womon ano mon in lho maiiiago maikol. all womon (ano all mon) appioximaloly foim
a conlinuum ano oach inoiyioual has a moasuio closo lo zoio. Lol 1
u
ano 1
n
oonolo lho conlinuum
foimoo Ly womon ano mon iospocliyoly. Wo noimalizo 1
u
ano lol 1
u
= (0. 1). Sinco lho sox ialio is
c. lho sol of mon 1
n
= (0. c). Mon ano womon aio oiooioo in such a way lhal a highoi yaluo in lho
sol moans a highoi ianking Ly momLois of lho opposilo sox.
In oouiliLiium. lhoio oxisls a uniouo mapping (¬
u
) foi womon in lho maiiiago maikol. ¬
u
: 1
u
÷
1
n
. 1hal is. woman i (i ÷ 1
u
) is mappoo lo man , (, ÷ 1
n
). giyon all lho sayings ialos ano omolional
ulilily oiaws. 1his implios a mapping fiom a comLinalion (:
u
I
. :
u
I
) lo anolhoi comLinalion (:
n
;
. :
n
;
).
Lofoio sho onlois lho maiiiago maikol. sho knows only lho oisliiLulion of hoi own lypo Lul nol lho
oxacl yaluo. As a iosull. lho lypo of hoi fuluio husLano (:
n
;
. :
n
;
) is also a ianoom yaiiaLlo. Woman
i`s socono poiioo oxpocloo ulilily is

max

n(c
2u,I,;
) ÷:
n
t
r
( Is
r
1
,n
r
1
,s
r
1
,n
r
1
,s
r
,n
r
)
. n(1:
u
I
n
u
I
)

d1
u
(:
u
I
)
=

¯ t
r
1

n(c
2u,I,;
) ÷:
n
t
r
( Is
r
1
,n
r
1
,s
r
1
,n
r
1
,s
r
,n
r
)

d1
u
(:
u
I
) ÷

¯ t
r
1
n(1:
u
I
n
u
I
) d1
u
(:
u
I
)
whoio ¯ ¬
u
I
is hoi lhiosholo ianking on mon such lhal sho is inoiloionl Lolwoon maiiiago oi nol. Any
lowoi-iankoo man. oi any man wilh ¬
u
I
< ¯ ¬
u
I
. won`l Lo choson Ly hoi.
4
If only womon can pioposo ano mon iospono wilh oofoiioo accoplanco. lho samo malching oulcomos will omoigo.
Whal wo hayo lo iulo oul is lhal Lolh mon ano womon can pioposo. in which caso. ono cannol pioyo lhal lho malching
is uniouo.
11
Sinco wo assumo lhoio aio (woakly) fowoi womon lhan mon. wo oxpano lho sol 1
u
lo
¯
1
u
so
lhal
¯
1
u
= (0. c). In lho oxpanooo sol. womon in lho maiiiago maikol slail fiom yaluo c ÷ 1 lo c.
1ho moasuio foi womon in lho maiiiago maikol iomains ono. In oouiliLiium. lhoio oxisls an uniouo
mapping foi mon in lho maiiiago maikol: ¬
n
: 1
n
÷
¯
1
u
. whoio ¬
n
maps man , (, ÷ 1
n
) lo woman i
(i ÷ 1
u
). 1hoso mon wilh a low yaluo i < c÷1 in sol
¯
1
u
will nol Lo maiiioo. In lhal caso. :
u
t
r
(;)
= 0
ano c
2n,;,I
= 1:
n
;
n
n
;
. In gonoial. man ,`s socono poiioo oxpocloo ulilily is

max

n(c
2n,;,I
) ÷:
u
t
r
( ;s
r
j
,n
r
j
,s
r
j
,n
r
j
,s
r
,n
r
)
. n

1:
n
;
n
n
;

d1
n

:
n
;

=

¯ t
r
j

n(c
2n,;,I
) ÷:
u
t
r
( ;s
r
j
,n
r
j
,s
r
j
,n
r
j
,s
r
,n
r
)

d1
n

:
n
;

÷

¯ t
r
j
n

1:
n
;
n
n
;

d1
n

:
n
;

whoio ¯ ¬
n
;
is his lhiosholo ianking on all womon. Any woman wilh a pooioi iank. ¬
n
;
< ¯ ¬
n
;
. will nol
Lo choson Ly him.
Wo assumo lhal lho oonsily funclions of :
n
ano :
u
aio conlinuously oiloionliaLlo. Sinco all mon
(womon) in lho maiiiago maikol hayo ioonlical pioLloms. lhoy mako lho samo sayings oocisions. In
oouiliLiium. a ¡··.ì.· n···:ìnì.· nnì·h.nn omoigos foi lhoso mon ano womon who aio maiiioo. In
olhoi woios. lhoio oxisls a mapping ' fiom :
u
lo :
n
such lhal
1 ÷1
u
(:
u
) = c(1 ÷1
n
('(:
u
)))
=
'(:
u
) = (1
n
)
l

1
u
(:
u
)
c
÷
c ÷1
c

Foi simplicily. wo assumo lhal :
u
ano :
n
aio oiawn fiom lho samo oisliiLulion. 1
u
= 1
n
= 1.
Fuilhoimoio. lho lowosl possiLlo yaluo of lho omolional ulilily :
nIn
is sumcionlly laigo lhal oyoiyono
oosiios lo Lo maiiioo. Wo also assumo lhal lhoio oxisls a small ano oxogonous possiLilily j lhal a
woman may nol lno a maiiiago pailnoi ouo lo fiiclions in lho maiiiago maikol. 1ho lasl assumplion
plays no iolo in lho analylical pail of lho moool Lul will holp lho ouanlilaliyo caliLialions laloi. In
oouiliLiium. giyon all hoi iiyals` saying oocisions ano :
u
. woman i`s socono poiioo ulilily is
(1 ÷j)
¸
n

i(1:
u
|
(i)n
u
|
÷1:
n
|
n
n
|
)
1
|÷l

÷

n
uax
n
u¡u
'( :
u
I
)d

1( :
u
I
)
¸
÷jn

1:
u
|
n
u
|
1
|

whoio :
u
I
= n

r(1s
r
t
(I)u
r
t
÷1s
r
t
u
r
t
)
1t÷1

÷n

r(1s
r
t
u
r
t
÷1s
r
t
u
r
t
)
1t÷1

÷:
u
.
Duo lo symmoliy. wo oiop lho suL-inoox i. A iopiosonlaliyo woman`s lisl oiooi conoilion. giyon
mon`s sayings oocisions. is
÷n

lu
n
u
|
1
|
÷(1 ÷j)
¸
n

2u
0C
u
2,|÷l
0:
u
|
÷
0

' ( :
u
) d

1
u
( :
u
)
0:
u
|
¸
÷jn

2u,n
n
u
|
1
|÷l
= 0 (8.ò)
12
whoio
0

' ( :
u
) d

1( :
u
)
0:
u
|
= in

2u
1
n
u
|
1
|÷l
¸
'

(:
u
)d1(:
u
) ÷'(:
nIn
)1(:
nIn
)

Similaily. a iopiosonlaliyo man`s socono-poiioo ulilily is
(1÷j)
¸

c
n
;
n

i(1:
u
|
n
u
|
÷1:
n
|
(,)n
n
|
)
1
|÷l

÷

n
uax
1(n
u¡u
)
'
l

:
n
;

d

1( :
n
;
)
¸
÷

(1 ÷j)(1 ÷

c
n
;
) ÷j

n

1:
n
|
(,)n
n
|
1
|÷l

whoio :
n
;
= n

r(1s
r
t
u
r
t
÷1s
r
t
(;)u
r
t
)
1t÷1

÷ n

r(1s
r
t
u
r
t
÷1s
r
t
u
r
t
)
1t÷1

÷ :
n
;
ano

c
n
;
is lho pioLaLilily ho gols
maiiioo

c
n
;
= Ii

n(C
u
2,|÷l
(,)) ÷n(C
u
2,|÷l
) ÷:
n
;
_ '(:
nIn
)

1:
u
n
u
. 1:
n
n
n

= 1 ÷1

'(:
nIn
) ÷n(C
u
2,|÷l
(,)) ÷n(C
u
2,|÷l
)

(8.6)
His lisl oiooi conoilion is
÷n

ln
n
n
|
1
|
÷(1÷j)

c
n
n

2n
dc
r
2.t÷1
ds
r
t
÷

1(n
u¡u
)
d1
1
( n
r
)
ds
r
t
d

1
n
( :
n
)
÷1

'(:
nIn
)

n

2u
dc
r
2.t÷1
ds
r
t

n
2n
÷n
2n,n
÷:
nIn

¸
¸
÷[(1 ÷c
n
) (1 ÷j) ÷j[ n

2n,n
n
n
|
1
|÷l
= 0
(8.7)
whoio

1(n
u¡u
)
0'
l
( :
n
)
0:
n
d

1
n
( :
n
) = in

2u
1
n
n
|
1
|÷l

1(n
u¡u
)

'
l

(:
n
) d1(:
n
)
Foi simplicily. wo assumo lhal womon ano mon will oain lho samo lisl poiioo laLoi incomo ano
lhal lhoio is no lax. i.o.. n
u
|
= n
n
|
= n
|
. Wo now oolno an oouiliLiium in lhis oconomy.
DehnItIon 2 ¹n ·n&.|.h:.&n .· n ··ì ·] ·n.nn· :nì··. ·n¡.ìn| nnJ |nh·: n||··nì.·n hj ···ì·:. nnJ ìh·
:·|nì.· ¡:.·· ·] n·nì:nJnh|· n··J ¦:
u
|
. :
n
|
. 1
T,|÷l
. 1
Þ,|÷l
. 1
T|
. 1
Þ|
. 1
Þ|
¦ ìhnì ·nì.·]·· ìh· ]·||·&.nn
··nJ.ì.·n·:
..) Jh· ·n.nn· :nì·· hj ìh· :·¡:···nìnì.· &·nnn nnJ ìh· :·¡:···nìnì.· nnn. ··nJ.ì.·nn| ·n ·ìh·:
&·n·n nnJ n·n`· ·n.nn· :nì··. :
u
|
=
¸
:
u
I|
. :
u
I,|

nnJ :
n
|
=
¸
:
u
;|
. :
n
;,|

. nnr.n..· ìh·.: :··¡··ì.·
&ì.|.ì.··
:
u
I|
= aig max
¸
\
u
|
[ :
u
I,|
. :
n
|
. 1
T,|÷l
. 1
Þ,|÷l
. 1
T|
. 1
Þ|
. 1
Þ|

:
u
;|
= aig max
¸
\
n
|
[ :
u
|
. :
n
;,|
. 1
T,|÷l
. 1
Þ,|÷l
. 1
T|
. 1
Þ|
. 1
Þ|

...) Jh· nn:|·ì· ]·: ·n¡.ìn|. |nh·:. nnJ ì:nJnh|· nnJ n·nì:nJnh|· n··J· ·|·n:. nnJ ]:n· nnr.n..·
ìh·.: ¡:·]ì·. 1n ·ìh·: &·:J·. ¦1
T,|÷l
. 1
Þ,|÷l
. 1
T|
. 1
Þ|
. 1
Þ|
¦ ··|·· ....). ...·). .../). ...´). ...()
nnJ ...7).
18
SLocks to tLe sex ratIo Wo now consiooi an unanlicipaloo shock lo lho young cohoil`s sox ialio.
i.o.. lho sox ialio iisos fiom ono lo c( 1) fiom poiioo ì onwaios. 1ho naluio of lho shock is moliyaloo
Ly lho facls aLoul lho sox ialio imLalanco in China. Sinco a soyoio sox ialio imLalanco foi lho pio-
maiilal ago cohoil is a iolaliyoly ioconl phonomonon. lho olooi gonoialions` sayings oocisions woio
laigoly maoo whon lhoio was no soyoio sox ialio imLalanco. As lho shock is unanlicipaloo. (2.2) ano
(2.4) oo nol holo in poiioo t.
As in lho Lonchmaik moool. lho maikol cloaiing conoilion foi lho nonliaoaLlo gooo can Lo
io-wiillon as
1
Þ|
¹
Þ|
1
o
1
Þ|
1
lo
1
Þ|
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
= (1:
|l
n
|l
÷ (1 ÷:
|
)n
|
) (8.8)
whoio :
|
=
c
l÷c
:
n
|
÷
l
l÷c
:
u
|
is lho aggiogalo sayings ialo Ly lho young cohoil in poiioo t.
Ly (2.8) ano (2.ò). wo hayo
n
|
=
1
c
o
J
T
(1 ÷c
T
)
lo
J
(1 ÷c
T

T|

1
T|
1 ÷1
Þ|

o
J
=
1
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
1
Þ|
(1 ÷c
Þ

Þ|

1
Þ|
1
Þ|

o
1
(8.0)
Wo can solyo (8.ò). (8.7). (8.8) ano (8.0) lo oLlain lho oouiliLiium in poiioo t. If lho ulilily
funclion is of log foim. n(C) = lnC. foi all mon ano womon. ano : is oiawn fiom a unifoim oisliiLulion.
wo hayo lho following pioposilion.
IroposItIon 2 ¹· ìh· ··r :nì.· .n ìh· j·&nn ··h·:ì :.···. n :·¡:···nìnì.· nnn &·n||j .n·:·n··· h.·
·n.nn· :nì· &h.|· n :·¡:···nìnì.· &·nnn &·n||j :·J&··· h·: ·n.nn· :nì·. 1·&··:. ìh· ···n·nj-&.J·
·n.nn· :nì· .n·:·n··· &nnnh.n&·&·|j. Jh· :·n| ·r·hnnn· :nì· J·¡:··.nì·· nnJ ìh· ·&::·nì n···&nì :.···.
IrooI. Soo Apponoix L.
A fow iomaiks aio in oiooi. Fiisl. il is poihaps nol suipiising lhal lho iopiosonlaliyo man iaisos
his sayings ialo in iosponso lo a iiso in lho sox ialio Locauso lho nooo lo compolo in lho maiiiago
maikol Locomos gioaloi. Why ooos lho iopiosonlaliyo woman ioouco hoi sayings ialo´ Locauso sho
anlicipalos a highoi sayings ialo fiom hoi fuluio husLano. sho ooos nol nooo lo saciilco hoi lisl-poiioo
consumplion as much as sho olhoiwiso woulo hayo lo.
Socono. why ooos lho aggiogalo sayings ialo iiso in iosponso lo a iiso in lho sox ialio´ In olhoi
woios. why is lho inciomonl in mon`s sayings gioaloi lhan lho ooclino in womon`s sayings´ Inluiliyoly.
a iopiosonlaliyo man iaisos his sayings ialo foi lwo ioasons: in aooilion lo impioying his iolaliyo
slanoing in lho maiiiago maikol. ho iaisos his sayings ialo lo mako up foi lho lowoi sayings ialo Ly his
fuluio wifo. 1ho moio his fuluio wifo is oxpocloo lo cul oown hoi sayings. lho moio ho woulo hayo lo
iaiso his own sayings lo componsalo. 1his onsuios lhal his inciomonlal sayings is moio lhan onough lo
olsol any ioouclion in his fuluio wifo`s sayings. In aooilion. sinco mon sayo moio. lho iising shaio of
mon in lho populalion woulo also iaiso lho aggiogalo sayings ialo. Whilo Lolh channols conliiLulo lo a
14
iiso in lho aggiogalo sayings ialo. il is oasy lo yoiify lhal lho lisl channol (lho inciomonlal compoliliyo
sayings Ly any giyon man) is moio impoilanl lhan lho socono olocl (a chango in lho composilion of
lho populalion wilh oiloionl saying pioponsilios).
1hiio. onco wo oLlain an incioaso in lho aggiogalo sayings ialo. lho logic fiom lho pioyious ono-
gonooi Lonchmaik moool applios. In pailiculai. lho iolaliyo piico of lho non-liaoaLlo gooo ooclinos
(ano honco lho ioal oxchango ialo oopiocialos). ano lho cuiionl accounl iisos.
Similai lo lho Lonchmaik moool wilh a singlo gonooi. onco lho shock is oLsoiyoo ano lakon inlo
accounl in poiioo t ÷1. (2.2) ano (2.4) holo in oouiliLiium. Ly solying (2.2). (2.8). (2.4) ano (2.ò). wo
hayo
1
Þ|
= 1
c
1
c
J
1c
J
ano 1
|÷l
= 1
~(c
1
c
J
)
1c
J
1his moans lhal lho ioal oxchango ialo ano lho cuiionl accounl will ioluin lo lho pioyious yaluos afloi
ono poiioo.
3.2 CapItaI ad]ustnent costs
Wilhoul aooilional fiiclions. a shock lo lho sox ialio can only alocl lho ioal oxchango ialo foi
ono poiioo. If lhoio aio capilal aojuslmonl cosls in oach socloi. lho olocl on lho ioal oxchango ialo
can Lo piolongoo. Wo assumo lhal lho capilal accumulalion in oach socloi is as following:
1
|÷l
= (1 ÷c)1
|
÷1
|
÷
/
2

1
|
1
|
÷c

2
1
|
whoio c is lho oopiocialion ialo ano 1
|
is inyoslmonl.
b
2

1t
1t
÷c

2
1
|
iopiosonls lho aojuslmonl cosl
as in Chaii. Kohoo ano McGiallan (2002).
1hon (2.2) ano (2.4) Locomo. iospocliyoly.
1 = 1 ÷c ÷
1
c
o
J
T
(1 ÷c
T
)
lo
J
c
T
¹
T|

1
T|
1
T|

lo
J
÷/1

1
T|
1
T|
÷c

÷
/
2

1
T|
1
T|

2
÷c
2

(8.10)
1 = 1 ÷c ÷
1
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
1
Þ|
c
Þ
¹
Þ|

1
Þ|
1
Þ|

lo
J
÷/1

1
Þ|
1
Þ|
÷c

÷
/
2

1
Þ|
1
Þ|

2
÷c
2

(8.11)
Wilhoul capilal aojuslmonl cosl. i.o.. / = 0. lho piico of lho nonliaoaLlo gooo will go Lack lo ils

oouiliLiium loyol in poiioo t ÷ 1. If / 0. lhon
1
Þ|
=
l
o
c
J
J
(lo
J
)
1c
J
c
T
¹
T|÷l

J
Jt÷1
1
Jt÷1

lo
J
÷/1

1
Jt÷1
1
Jt÷1
÷
1
1t÷1
1
1t÷1

÷
b
2

1
Jt÷1
1
Jt÷1

2
÷

1
1t÷1
1
1t÷1

2

l
o
c
1
1
(lo
1
)
1c
1
c
Þ
¹
Þ|÷l

J
1t÷1
1
1t÷1

lo
J
1
Þ|
is now a funclion of
1
Jt÷1
1
Jt÷1
ano
1
1t÷1
1
1t÷1
. If
1
Jt÷1
1
Jt÷1
=
1
1t÷1
1
1t÷1
. 1
Þ|
is nol a conslanl. 1his moans lhal.
wilh capilal aojuslmonl cosls. lho piico of lho nonliaoaLlo gooo ooos nol ioluin immooialoly lo ils
long-iun oouiliLiium loyol. As a iosull. a iiso in lho sox ialio can hayo a long-lasling ano oopiossing
olocl on lho ioal oxchango ialo.
3.3 Tvo Iarge countrIes
Wo now luin lo a woilo wilh lwo laigo counliios: Homo ano Foioign. Assumo lhal lhoy aio
ioonlical in oyoiy iospocl oxcopl foi lhoii sox ialios. Spocilcally. in poiioo t. lho sox ialio of lho young
cohoil in Homo iisos fiom ono lo c (c 1). whilo Foioign always has a Lalancoo sox ialio. Housoholos
in oach counliy consumo a liaoaLlo gooo ano a nonliaoaLlo gooo.
C
|
=
C
~
Þ|
C
l~
T|

~
(1 ÷)
l~
ano C

|
=
(C

Þ|
)
~
(C

T|
)
l~

~
(1 ÷)
l~
whoio C
|
ano C

|
iopiosonl homo ano foioign consumplion inooxos. iospocliyoly. Sinco wo chooso lho
liaoaLlo gooo as lho numoiaiio. lho consumoi piico inoox is 1
|
= 1
~
Þ|
. whoio 1
Þ|
is lho piico of lho
homo piooucoo nonliaoaLlo gooo. Similaily. lho consumoi piico inoox in Foioign is 1

|
= (1

Þ|
)
~
.
1ho iiso in Homo`s sox ialio in poiioo ì is assumoo lo Lo unanlicipaloo. As a iosull. (2.2) ano
(2.4) fail in Lolh Homo ano Foioign. Ly lho samo ioasoning. Homo oxpoiioncos a ioal oxchango ialo
oopiocialion in poiioo t. Lul a ioal appiocialion in poiioo t ÷ 1. Wo can wiilo lho cuiionl accounl in
Homo ano Foioign as follows:

|
= :
|
n
|
÷:
|l
n
|l
÷1
|
÷1
|÷l
ano C¹

|
= :

|
n

|
÷:

|l
n

|l
÷1

|
÷1

|÷l
Lofoio lho shock. wo hao
:
|l
= :

|l
. n
|l
= n

|l
ano 1
|
= 1

|
In poiioo t ÷ 1. wo hayo
1
Þ|
= 1
Þ|
. n
|÷l
= n

|÷l
. ano 1
|÷l
= 1

|÷l
16
ano lho oomano foi lho nonliaoaLlo gooo is
Q
Þ,|÷l
=
n
|÷l
((1 ÷1) :
|
÷ 1)
1
Þ|
ano Q

Þ,|÷l
=
n

|÷l
((1 ÷1) :

|
÷ 1)
1
Þ|
Sinco Homo now has a highoi sox ialio lhan Foioign. wo hayo :
|
:

|
. ano lhoiofoio
Q
Þ,|÷l
Q

Þ,|÷l
Wo assumo lhal lho nonliaoaLlo socloi is moio laLoi-inlonsiyo. i.o.. c
Þ
< c
T
. Giyon lho samo
lochnologios ano lho samo laLoi onoowmonls in lho lwo counliios. wo hayo
1
|÷l
< 1

|÷l
In poiioo t. sinco nolhing changos in Foioign. il musl Lo lho caso lhal :

|
n

|
= :
|l
n
|l
. Following
lho samo slops as in lho caso of a small opon oconomy. wo can show lhal :
|
n
|
:
|l
n
|l
= :

|
n

|
.
1hon il is oasy lo show lhal C¹
|
0 C¹

|
. In olhoi woios. Homo oxhiLils a cuiionl accounl suiplus
whilo Foioign oxpoiioncos a cuiionl accounl oolcil.
3.4 Endogenous IaLor suppIv
Wo luin lo lho caso of onoogonous laLoi supply. Jusl as a malo iaisos his sayings ialo lo gain a
compoliliyo aoyanlago in lho maiiiago maikol. ho may chooso lo incioaso his supply of laLoi foi lho
samo ioason in iosponso lo a iiso in lho sox ialio. 1his can lianslalo inlo an incioaso in lho olocliyo
aggiogalo laLoi supply if womon oo nol oocioaso lhoii laLoi supply loo much. If lho pioouclion of
lho nonliaoaLlo gooo is moio laLoi-inlonsiyo. lho incioaso in lho olocliyo laLoi supply can ioouco
lho iolaliyo piico of lho non-liaoaLlo gooo (ano lho yaluo of lho ioal oxchango ialo). 1hoiofoio.
onoogonous laLoi supply coulo ioinfoico lho sayings channol fiom lho sox ialio shock. loaoing lo an
aooilional ioouclion in lho ioal oxchango ialo.
Wo allow oach poison lo onoogonously chooso lho lisl poiioo laLoi supply ano lho ulilily funclion
of lho lisl poiioo is n(C) ÷·(1 ÷1). whoio 1 is lho laLoi supply ano ·(1 ÷1) is lho ulilily funclion
of loisuio. As in lho slanoaio liloialuio. wo assumo lhal ·

0 ano ·

< 0. Again. foi simplicily.
wo assumo no lax on lho laLoi incomo. 1ho ulilily funclion goyoining lho loisuio-laLoi choico is lho
samo foi mon ano womon. In olhoi woios. Ly assumplion. mon ano womon aio inliinsically symmoliic
oxcopl foi lhoii ialio in lho socioly.
Wo can iowiilo lho oplimizalion pioLlom foi a iopiosonlaliyo woman as following:
max n(C
u
l|
) ÷·(1 ÷1
u
|
) ÷1
|

n(C
u
2,|÷l
) ÷:
n

17
wilh lho Luogol consliainl
1
|
C
u
l|
= (1 ÷:
u
|
)n
|
1
u
|
1
|÷l
C
u
2,|÷l
=

i(1:
u
|
1
u
|
÷1:
n
|
1
n
|
) n
|
if maiiioo
1:
u
|
n
|
1
u
|
olhoiwiso
1ho lisl oiooi conoilion wilh iospocl lo hoi laLoi supply is
n

lu
(1 ÷:
u
|
)n
|
1
|
÷
¸
n

2u
0C
u
2,|÷l
01
u
|
÷
0

' ( :
u
) d

1
u
( :
u
)
01
u
|
¸
÷jn

2u
i1:
u
|
n
|
1
|÷l
÷·

u
= 0
Nolico lhal
dc
r
2.t÷1
dJ
r
t
=
dc
r
2.t÷1
ds
r
t
s
r
t
J
r
t
ano
d

1( n
r
)J

J
r
( n
r
)
dJ
r
t
=
d

1( n
r
)J

J
r
( n
r
)
ds
r
t
s
r
t
J
r
t
. ComLining lho ooualion
aLoyo wilh (8.ò). wo hayo
n
|
1
|
=
·

u
n

lu
(8.12)
1ho oplimizalion pioLlom foi a iopiosonlaliyo man is similai:
max n(C
n
l|
) ÷·(1 ÷1
n
|
) ÷1
|

n(C
n
2,|÷l
) ÷:
u

wilh lho Luogol consliainl
1
|
C
n
l|
= (1 ÷:
n
|
)n
|
1
n
|
1
|÷l
C
n
2,|÷l
=

i(1:
n
|
1
n
|
÷1:
n
|
1
n
|
) n
|
if maiiioo
1:
n
|
n
|
1
n
|
olhoiwiso
1ho oplimizalion conoilion foi his laLoi supply is
n
|
1
|
=
·

n
n

ln
(8.18)
On lho supply sioo. all oouiliLiium conoilions iomain lho samo oxcopl foi lho laLoi maikol cloaiing
conoilion. which now Locomos
1
T|
÷1
Þ|
=
1
1 ÷c
1
u
|
÷
c
1 ÷c
1
n
|
(8.14)
Wo now oolno an oouiliLiium foi such an oconomy.
DehnItIon 3 ¹n ·n&.|.h:.&n .· n ··ì ¦(:
u
|
. 1
u
|
) . (:
n
|
. 1
n
|
) . 1
T,|÷l
. 1
Þ,|÷l
. 1
T|
. 1
Þ|
. 1
Þ|
¦ ìhnì ·nì.·-
]·· ìh· ]·||·&.nn ··nJ.ì.·n·:
..) Jh· ·n.nn· nnJ |nh·: ·&¡¡|j J··.·.·n· hj &·n·n nnJ n·n. (:
u
|
. 1
u
|
) =
¸
:
u
I|
. :
u
I,|
. 1
u
I|
. 1
u
I,|

18
nnJ (:
n
|
. 1
n
|
) =
¸
:
n
I|
. :
n
I,|
. 1
n
I|
. 1
n
I,|

. nnr.n..· ìh·.: &ì.|.ì.··. :··¡··ì.·|j.
(:
u
I|
. 1
u
I|
) = aig max
¸
\
u
|
[

:
u
I,|
. 1
u
I,|

. (:
n
|
. 1
n
|
) . 1
T,|÷l
. 1
Þ,|÷l
. 1
T|
. 1
Þ|
. 1
Þ|

:
n
;|
. 1
n
;|

= aig max
¸
\
n
|
[ (:
u
|
. 1
u
|
) .

:
n
;,|
. 1
n
;,|

. 1
T,|÷l
. 1
Þ,|÷l
. 1
T|
. 1
Þ|
. 1
Þ|

...) Jh· nn:|·ì· ]·: h·ìh n··J· nnJ ]n·ì·:· ·|·n:. nnJ ]:n·` ¡:·]ì· n:· nnr.n..·J. 1n ·ìh·:
&·:J·. ¦1
T,|÷l
. 1
Þ,|÷l
. 1
T|
. 1
Þ|
. 1
Þ|
¦ ··|·· ....). ...·). .../). ...´). ...() nnJ .·.1/).
As Lofoio. wo assumo lhal n(C) = lnC. Wo lol 1
|
oonolo lho aggiogalo laLoi supply in poiioo t.
ano assumo lhal
u

J
u

is non-oocioasing in 1.
IroposItIon 3 ¹· ìh· ··r :nì.· ..n ìh· j·&nn ··h·:ì) :.···. n :·¡:···nìnì.· nnn &·n||j .n·:·n···
h·ìh h.· |nh·: ·&¡¡|j nnJ h.· ·n.nn· :nì·. &h.|· n :·¡:···nìnì.· &·nnn &·n||j :·J&··· h·ìh h·: |nh·:
·&¡¡|j nnJ h·: ·n.nn· :nì·. 1·&··:. ìh· ···n·nj-&.J· |nh·: ·&¡¡|j nnJ ·n.nn· :nì· h·ìh .n·:·n··
&nnnh.n&·&·|j. Jh· :·n| ·r·hnnn· :nì· J·¡:··.nì··. nnJ ìh· ·&::·nì n···&nì :.···.
IrooI. Soo Apponoix C.
In iosponso lo a iiso in lho sox ialio. foi lho samo ioason lhal mon may cul lhoii consumplion ano
incioaso lhoii sayings ialo. lhoy may cul oown lhoii loisuio ano incioaso lhoii laLoi supply. Similaily.
foi womon. foi lho samo ioason lhal inouco lhom lo ioouco lhoii sayings. lhoy may ioouco lhoii laLoi
supply (ano incioaso loisuio). In lho aggiogalo. foi lho samo ioason lhal lho incioaso in sayings Ly
mon is moio lhan onough lo olsol lho oocioaso in sayings Ly womon. lho incioaso in laLoi supply Ly
mon is also laigoi lhan lho oocioaso in laLoi supply Ly womon. 1hoiofoio. lho aggiogalo laLoi supply
iisos in iosponso lo a iiso in lho sox ialio.
Wilh a lxoo laLoi supply. il is woilh iomomLoiing lhal lho nonliaoaLlo socloi shiinks afloi a iiso
in lho sox ialio. 1ho ioason is lhal a ooclino in lho iolaliyo piico of lho nonliaoaLlo gooos (ouo lo lho
sayings channol) makos il loss alliacliyo foi laLoi ano capilal lo slay in lho nonliaoaLlo socloi. Now.
wilh an onoogonous laLoi supply. lho lolal olocliyo laLoi supply incioasos afloi a iiso in lho sox ialio
accoioing lo Iioposilion 8. Ly a logic similai lo lho IyLzinksy lhooiom. lhis Ly ilsolf has a lonooncy
lo inouco an oxpansion of lho nonliaoaLlo socloi if lho pioouclion of lho nonliaoaLlo gooo is moio
laLoi inlonsiyo. Iolaliyo lo lho caso of a lxoo laLoi supply. aooing lho olocl of onoogonous laLoi
supply loaos lo oilhoi an oxpansion of lho nonliaoaLlo socloi. oi al loasl a smalloi ioouclion in lho
sizo of lho nonliaoaLlo socloi. 1ho oxacl sconaiio ooponos on paiamoloi yaluos. Howoyoi. iogaioloss
of whal happons lo lho sizo of lho nonliaoaLlo socloi. lho piico of lho nonliaoaLlo gooo (ano lho yaluo
of lho ioal oxchango ialo) musl fall Ly a gioaloi amounl whon lho onoogonous laLoi supply olocl is
aoooo lo lho sayings olocl.
10
4 CaIILratIons
Wo slail fiom a simplo OLG moool in which oyoiy cohoil liyos lwo poiioos ano lhoio aio no
capilal aojuslmonl cosls. Wo lhon aoo somo moio ioalisms Ly (1) assuming a ò0-poiioo lifo ano (2)
inliooucing capilal aojuslmonl cosls.
4.1 Iaraneters
Wo lako lho annual inloiosl ialo 1 = 1.04 ano = 1
l
. Wo assumo lho liaoaLlo socloi has a
highoi capilal inlonsily. c
T
= 0.6 ano lho nonliaoaLlo socloi has a lowoi capilal inlonsily c
Þ
= 0.8.
1ho shaio of lho nonliaoaLlo gooo consumplion in lho aggiogalo consumplion is sol lo Lo 0.7. = 0.7.
Wilhin a family. lho congoslion foi family consumplion. i = 0.8.
1ho omolional ulilily : nooos lo follow a conlinuously oiloionlial oisliiLulion. Wo assumo a
liuncaloo noimal oisliiLulion which mighl Lo moio ioalislic lhan lho unifoim oisliiLulion usoo in
lho analylical moool. Wo chooso a slanoaio ooyialion lhal is iolaliyoly lighl. o = 0.01. 1his limils
lho oxlonl of holoiogonoily among womon (oi mon) in lho oyo of lho opposilo sox. Wo liuncalo lho
oisliiLulion al lho 1/ in lho lofl lail ano al lho 00/ in lho iighl lail. 1o chooso lho moan yaluo of lho
omolional ulilily. wo poifoim lho following lhoughl oxpoiimonl. Holoing all olhoi faclois conslanl. wo
can compulo lho incomo componsalion nooooo lo a lifo-limo Lacholoi lhal can makos him inoiloionl
Lolwoon Loing maiiioo ano Loing singlo.
n

1
1 ÷
(1 ÷r)n

= n

1
1 ÷
n

÷1 (:)
whoio rn is lho componsalion paio lo a lifo-limo Lacholoi foi Loing singlo ano
l
l÷o
(1 ÷ r)n is his
socono poiioo consumplion. Wo calculalo lho yaluo of r Lasoo on Llanchlowoi ano Oswalo (2004).
Iogiossing solf-iopoiloo woll-Loing scoios on incomo. maiiiago slalus. ano olhoi ooloiminanls. lhoy
oslimalo lhal a lasling maiiiago is. on ayoiago. woilh $100.000 (in 1000 oollais) poi yoai in lho Uniloo
Slalos (compaioo lo Loing wioowoo oi sopaialoo) ouiing 1072-1008. Sinco GDI poi poison omployoo
is aLoul $48.000 ouiing lho samo poiioo. lhis implios lhal a maiiiago is woilh moio lhan lwico lho
ayoiago incomo foi omployoo pooplo in lho U.S. Wo lako lho ialio r = 2 as lho Lonchmaik ano lhon
lho moan yaluo of lho omolional ulilily´loyo is:
1 (:) = n

8n
1 ÷

÷n

n
1 ÷

As a ioLuslnoss chock. wo will also consiooi r = 0.ò.
20
CLoIce oI Iaraneter YaIues
Iaiamolois Lonchmaik Souico ano ioLuslnoss chocks
Discounl facloi = 0.4ò Iioscoll (1086). oiscounl facloi lakos yaluo 0.06
Lasoo on annual fioouoncy. Wo lako 20 yoais as
ono poiioo. lhon = 0.06
20
· 0.4ò
Shaio of nonliaoaLlo gooo = 0.7 Luisloin ol al (2001)
in lho consumplion Laskol
NonliaoaLlo socloi capilal-inlonsily c
Þ
= 0.8 Luisloin ol al (2001)
1iaoaLlo socloi capilal-inlonsily c
T
= 0.6 Luisloin ol al (2001)
Shaio of capilal inpul c = 0.8ò Loinanko. Goilloi ano Gilchiisl (1000)
Congoslion inoox i = 0.8 i = 0.7. 0.0 in lho ioLuslnoss chocks.
Maiiiago maikol fiiclion
ò
j = 0.02 j = 0.0ò in lho ioLuslnoss chocks
Loyo. slanoaio ooyialion o = 0.01 o = 0.0ò in lho ioLuslnoss chocks
Loyo. moan r = 2 r = 0.ò in lho ioLuslnoss chocks
4.2 HesuIts Ior tLe 2-perIod OLC nodeI
In Figuio 1. wo sol paiamoloi i ooual lo 0.8. 1ho Lonchmaik caso sols r = 2. o = 0.01. ano
j = 0.02. Wilh an unLalancoo sox ialio ( c1). lho ioal oxchango ialo oopiocialos. As lho sox ialio
iisos fiom 1 lo 1.ò. lho oxlonl of ioal oxchango ialo oopiocialion incioasos fiom 0/ lo aLoul 8/.
Al lho samo limo. lho oconomy-wioo sayings ialo iisos fiom 12/ lo 20/. ano lho cuiionl accounl
suiplus iisos fiom 0/ lo 0/ of GDI. As lho lisl sol of ioLuslnoss chocks. wo oxpoiimonl wilh oiloionl
comLinalions of m=0.ò oi 2. o = 0.0ò oi 0.01. ano j = 0.02 oi 0.0ò. 1ho iosulls aio also iopoiloo in
Figuio 1. ano gonoially oo nol ooyialo fiom lho Lonchmaik yoiy much.
Wo also sol i lo Lo 0.7 oi 0.0. iospocliyoly. ano oxpoiimonl wilh oiloionl comLinalions of olhoi
paiamolois. 1ho iosulls aio iopoiloo in Figuios 2 ano 8. Gonoially spoaking. lho ioal oxchango ialo
always oopiocialos moio wilh a highoi sox ialio. Lolh lho sayings ialo ano lho cuiionl accounl (as a
shaio of GDI) iiso in iosponso lo a iiso in lho sox ialio.
Wo now consiooi onoogonous laLoi supply in Figuio 4. Wilh i = 0.8. r = 2. o = 0.01. ano
j = 0.02. wo oLlain a much sliongoi oxchango ialo oopiocialion. As lho sox ialio iisos fiom 1 lo 1.ò.
lho oxlonl of lho ioal oxchango ialo oopiocialion also iisos fiom 0/ lo aLoul 8ò/. 1ho aggiogalo
sayings ialo iisos fiom 12/ lo 24/. whilo lho cuiionl accounl suiplus iisos fiom 0/ lisl lo closo lo
6/ of GDI ano ioyoiso slighlly lo 4/ of GDI. IoLuslnoss chocks wilh olhoi comLinalions of lho
paiamolois aio iopoiloo in Figuios ò ano 6. 1ho iosulls aio Lioaoly in lino wilh lho Lonchmaik
caliLialion. In pailiculai. wilh an onoogonous laLoi supply. a giyon iiso in lho sox ialio loaos lo a
gioaloi iosponso in lho ioal oxchango ialo.
ò
is lho oxogonous possiLilily lhal any inoiyioual (a womon oi a man) onloiing lho maiiiago maikol is Lumpoo ol
lho maikol inooponoonl of lho sox ialio.
21
Whilo lho aggiogalo sayings ialo always iisos wilh lho sox ialio. lho mooosl non-monolonic
picluio of lho cuiionl accounl iosponso oosoiyos somo commonls. Wilh a lxoo laLoi supply. a iiso in
lho sox ialio loaos lo an oxpansion of liaoaLlo gooo pioouclion Lul a conliaclion of nonliaoaLlo gooo
pioouclion. 1his loaos lo yoiy lilllo chango in lho aggiogalo (oomoslic) inyoslmonl ialo. As a iosull.
a highoi sox ialio loaos lo a highoi sayings ialo. which piooucos an incioaso in lho cuiionl accounl
Lalanco. In conliasl. wilh an onoogonous laLoi supply. a highoi sox ialio loaos lo an incioaso in lho
olocliyo laLoi supply. Lolh lho liaoaLlo gooo ano lho nonliaoaLlo gooo soclois coulo oxpano (oi al
loasl lho non-liaoaLlo socloi shiinks Ly a smalloi amounl lhan in lho caso of a lxoo laLoi supply).
which loaos lo an incioaso in aggiogalo oomoslic inyoslmonl. As Figuios 4-6 show. foi lho inilial
iiso in lho sox ialio (fiom 1 lo 1.1ò). lho cuiionl accounl suiplus incioasos monolonically. inoicaling
lhal lho incioaso in lho aggiogalo sayings ialo oulpacos lho incioaso in lho aggiogalo inyoslmonl ialo.
Afloi lhal poinl. any aooilional incioaso in lho sox ialio loaos lo a smalloi cuiionl accounl suiplus.
inoicaling lhal lho inciomonlal sayings ialo is smalloi lhan lho inciomonlal inyoslmonl ialo. Sinco
yiilually all oconomios in lho ioal woilo hayo sox ialios (foi lho pio-maiilal ago cohoil) loss lhan 1.1ò.
wo oo nol oxpocl lo soo lho luining poinl in lho cuiionl accounl in lho oala.
4.3 An OLC nodeI In vLIcL a coLort IIves 50 perIods
Wo now oxlono oui Lonchmaik moool Ly assuming lhal oyoiy cohoil liyos ò0 poiioos. Lyoiyono
woiks in lho lisl 80 poiioos. ano ioliios in lho iomaining 20 poiioos. If ono gols maiiioo. lho maiiiago
lako placo in lho tlh poiioo. Whilo oiloioncos in lho sayings ialos Ly paionls wilh a son yoisus paionls
wilh a oaughloi aio an impoilanl foaluio of lho oala (Woi ano Zhang. 2000). wo aio nol aLlo lo solyo
lho pioLlom lhal foaluios simullanoously paionlal sayings foi chiloion ano a nonliaoaLlo socloi. [Soo
Du ano Woi (2010) foi a lhioo-poiioo moool wilh paionlal sayings foi lhoii chilo Lul wilhoul a
nonliaoaLlo socloi.[ Insloao. wo sluoy a caso in which mon ano womon sayo foi lhomsolyos. Howoyoi.
as wo iocognizo lho ouanlilaliyo impoilanco of paionlal sayings in lho oala. wo chooso t = 20 as oui
Lonchmaik caso so lho liming of lho maiiiago is somowhoio Lolwoon lho lypical numLoi of woiking
yoais Ly paionls whon lhoii chilo gols maiiioo ano lho lypical numLoi of woiking yoais Ly a young
poison whon ho´sho gols maiiioo. Gonoially spoaking. lho gioaloi lho yaluo of t. lho sliongoi is lho
aggiogalo sayings iosponso lo a giyon iiso in lho sox ialio.
A iopiosonlaliyo woman`s oplimizalion pioLlom is
max
rl
¸
|=l

|l
n(c
u
|
) ÷1
l
¸
50
¸
|=r

|l
(n(c
u
|
) ÷:
n
)
¸
Foi t < t. whon lho woman is slill singlo. lho inloilompoial Luogol consliainl is
¹
|÷l
= 1(¹
|
÷n
u
|
÷1
|
c
u
|
)
22
whoio ¹
|
is lho woallh holo Ly lho woman al lho Loginning of poiioo t. n
u
|
= n
|
1
u
|
is hoi laLoi incomo
al lho ago t. Afloi maiiiago (t _ t). hoi family Luogol consliainl Locomos
¹
1
|÷l
=

1

¹
1
|
÷n
|
1
u
|
÷1
|
c
|

if t _ 80
1

¹
1
|
÷c
u
|

if t 80
whoio ¹
1
|
is lho loyol of family woallh (holo Ly wifo ano husLano) al lho Loginning of poiioo t. c
|
is
lho puLlic gooo consumplion Ly wifo ano husLano. which lakos lho samo foim as in lho lwo poiioo
OLG moool. 1ho oplimizalion pioLlom foi a iopiosonlaliyo man is similai. 1o simplify lho calculalion
ano gonoialo inloiosling iosulls. wo assumo lhal lhoio is a lowoi Louno of laLoi supply
¯
1. 1
I
|
_
¯
1
(i = n. :).
As Lofoio. wo lako 1 = 1.04 as lho annual gioss inloiosl ialo. 1ho suLjocliyo oiscounl facloi now
lakos lho yaluo of = 1´1. Wo assumo capilal accumulalion oyolyos in lho following way:
1
|÷l
= (1 ÷c)1
|
÷1
|
÷
/
2

1
|
1
|
÷c

2
1
|
whoio
b
2

1t
1t
÷c

2
1
|
iopiosonls lho ouaoialic capilal aojuslmonl cosl. Following Chaii. Kohoo ano
McGiallan (2002). wo assumo c = 0.1 ano / = 2.72.
Foi lho naluio of lho sox ialio shock. wo uso oomogiaphic changos in China oyoi lho lasl lwo
oocaoos as a guioo. As lho oala oxhiLils a sloaoy incioaso in lho sox ialio in lho pio-maiilal ago cohoil
sinco 2002. wo lol lho sox ialio al Liilh in lho moool iiso conlinuously ano smoolhly unlil il ioachos
1.2 in poiioo 20. 1ho sox ialio lhon slays al lhal loyol in all suLsoouonl poiioos.
1ho caliLialion iosulls aio shown in Figuios 7. As lho sox ialio iisos fiom 1 in poiioo 0 lo 1.2
in poiioo 20. lho ioal oxchango ialo oopiocialos Ly moio lhan 10 poiconl. 1ho oconomy-wioo sayings
ialo ano lho cuiionl accounl iiso Ly moio lhan 0 poiconl of GDI. As a ioLuslnoss chock. if capilal
aojusls moio slowly. i.o.. wilh a highoi cosl of capilal aojuslmonl. lho ioal oxchango ialo oopiocialos
Ly aLoul 11 poiconl. 1ho conyoiso is liuo whon lho aojuslmonl cosl is lowoi.
5 Sone suggestIve enpIrIcs
Sinco lho sox ialio olocl is noyol. il is usoful lo piosonl ano oiscuss somo ompiiical oyioonco.
Wo iocall lisl lho oyioonco in Woi ano Zhang (2000) lhal a highoi sox ialio has loo lo a iiso in lho
housoholo sayings ialo in China. Chinoso housoholos wilh a son in Lolh iuial ano uiLan aioas lono
lo sayo moio in iogions wilh a moio skowoo sox ialio. 1ho sayings ialo Ly uiLan housoholos wilh a
oaughloi also lono lo iiso wilh lho local sox ialio. allhough lho sayings ialo Ly iuial housoholos wilh a
oaughloi appoais lo Lo insonsiliyo lo lho local sox ialio. 1ho sayings Lohayioi Ly oaughloi-housoholos
is consislonl wilh lho nolion lhal inlia-housoholo Laigaining is sumcionlly impoilanl lhal lhoy oo nol
28
cul oown sayings ialo in iosponso lo a highoi sox ialio (1ho moool of Du ano Woi. 2010. foimalizos lhis
inluilion). Using iogional yaiialions in lho onofoicomonl of lho familily planning policy as insliumonls
foi lho local sox ialio. Woi ano Zhang (2000) suggosl lhal lho posiliyo coiiolalion iolocls a causal
olocl fiom a highoi sox ialio lo a highoi sayings ialo. Lasoo on lho IV iogiossions. lhoy oslimalo lhal
lho iiso in lho sox ialio may oxplain aLoul half of lho oLsoiyoo iiso in lho housoholo sayings ialo in
lho lasl lwo oocaoos.
Somo oyioonco lhal a highoi sox ialio has incioasoo olocliyo laLoi supply is pioyiooo in Woi
ano Zhang (2011). In pailiculai. lho numLoi of oays a iuial migianl woikoi choosos lo woik away
fiom homo lonos lo iiso wilh lho local sox ialio. ospocially if lho migianl woikoi has a son al homo.
Similaily. migianl woikois wilh a son fiom a iogion wilh a moio skowoo sox ialio aio also moio willing
lo woik in a joL lhal aio moio oangoious ano loss ploasanl. such as in minining oi consliuclion. oi
wilh oxposuio lo oxliomo hoal. colo oi hazaioous maloiial. piosumaLly foi a Lolloi wago.
Wo now pioyioo somo suggosliyo cioss-counliy oyioonco on how lho sox ialio imLalanco may alocl
lho ioal oxchango ialo. Wo lisl iun iogiossions Lasoo on lho following spocilcalion:
ln111
I
= c ÷ sox ialio ÷ 7 ÷-
I
whoio 111
I
is lho ioal oxchango ialo foi counliy i. 7 is lho sol of conliol yaiiaLlos. Wo consiooi a
soouonlially oxpanoing lisl of conliol yaiiaLlos incluoing log GDI poi capila. lnancial ooyolopmonl
inoox. goyoinmonl lscal oolcil. ooponoonco ialio. ano J· ]n·ì· oxchango ialo iogimo classilcalions.
1ho oala foi lho ioal oxchango ialo ano ioal GDI poi capila aio oLlainoo fiom Ionn Woilo 1aLlo
6.8. 1ho piico loyol of GDI" in lho Ionn Woilo 1aLlo is oouiyalonl lo lho inyoiso of lho ioal oxchango
ialo in lho moool: A highoi yaluo of lho piico loyol of GDI" moans a lowoi yaluo of lho ioal oxchango
ialo. 1ho sox ialio oala is oLlainoo fiom lho Woilo FaclLook. As wo aio nol aLlo lo lno lho sox ialio
foi lho ago cohoil 10-2ò foi a laigo numLoi of counliios. wo uso ago gioup 0-1ò insloao lo maximizo
lho counliy coyoiago.
Wo uso lwo pioxios foi lnancial ooyolopmonl. 1ho lisl is lho ialio of piiyalo ciooil lo GDI.
fiom lho Woilo Lank`s WDI oalasol. 1his is poihaps lho mosl commonly usoo pioxy in lho slanoaio
liloialuio. 1hoio is a cloai oullioi wilh lhis pioxy: China has a yoiy high loyol of Lank ciooil. oxcoooing
100/ of GDI. Howoyoi. 80/ of lho Lank loans go lo slalo-ownoo lims. which aio polonlially loss
omcionl lhan piiyalo lims (soo Allon. Qian. ano Qian. 2004). 1o ooal wilh lhis pioLlom. wo mooify
lho inoox Ly mulliplying lho ciooil lo GDI ialio foi China Ly 0.2. Locauso lhis moasuio is fai fiom
Loing poifocl. wo also uso a socono moasuio. which is lho loyol of lnancial syslom sophislicalion as
poicoiyoo Ly a suiyoy of Lusinoss oxoculiyos iopoiloo in lho GloLal Compoliliyonoss Iopoil (GCI).
Foi oxchango ialo iogimos. wo uso lwo oo faclo classilcalions. 1ho lisl comos fiom Ioinhail ano
Iogol (2004). who classify all iogimos inlo foui gioups: pog. ciawling pog. managoo loaling ano fioo
loaling. 1ho socono classilcalion comos fiom Loyy-Yoyali ano Sluizonoggoi (200ò). who uso lhioo
gioups: lx. inloimooialo ano fioo loal.
24
Foi lho ooponoonl yaiiaLlo. logILI. ano mosl iogiossois whoio appiopiialo. wo uso lhoii ayoi-
ago yaluos oyoi lho poiioo 2004-2008. 1ho ayoiaging piocoss is moanl lo smoolh oul Lusinoss cyclo
luclualions ano olhoi noisos. 1ho poiioo 2004-2008 is choson Locauso il is iolaliyoly ioconl. ano lho
oala aio ayailaLlo foi a laigo numLoi of counliios. (Wo hayo also oxaminoo a singlo yoai. 2006. ano
oLlainoo similai iosulls).
1aLlo 1 pioyioos summaiy slalislics foi lho koy yaiiaLlos. 1ho log ILI iangos fiom -2.22 lo 0.41
in lho samplo. wilh a moan of -0.74 ano a slanoaio ooyialion of 0.ò0. 1ho yaluo of log ILI foi China
inoicalos a suLslanlial unooiyalualion on lho oiooi of 4ò/ whon compaioo lo lho simplo ciiloiion of
puichasing powoi paiily.
Foi lho sox ialio foi lho ago cohoil 0-1ò. Lolh lho moan ano lho mooian acioss counliios aio
1.04. ano lho slanoaio ooyialion is 0.02. Foi lhis ago cohoil. all counliios in lho samplo hayo a sox
ialio lhal is al loasl 1. 1ho sox ialio foi mosl of lho counliios is Lolwoon 1 ano 1.07. 1ho following
oconomios hayo a sox ialio lhal is 1.07 oi highoi: China (1.18). Macao (1.11). Koioa (1.11). Singapoio
(1.00). Swilzoilano (1.08). Hong Kong (1.08). Violnam (1.08). Joioan (1.07). Ioilugal (1.07) ano
Inoia (1.07). 1hoy iopiosonl lho mosl skowoo sox ialios in lho samplo. China. Ly fai. has lho mosl
unLalancoo sox ialio in lho woilo. If lho samo sox ialio poisisls inlo lho maiiiago maikol. lhon al
loasl ono oul of oyoiy oighl young mon cannol gol maiiioo. As wiyos aio lypically a fow yoais youngoi
lhan lhoii husLanos. lho aclual pioLaLilily of nol Loing aLlo lo maiiy is likoly lo Lo moooslly Lolloi
in a counliy wilh a giowing populalion (foi which laloi cohoils aio slighlly laigoi). Nonolholoss. lho
iolaliyo lighlnoss of lho maiiiago maikol foi mon acioss counliios shoulo slill Lo highly coiiolaloo wilh
lhis sox ialio moasuio. In aooilion. unliko mosl olhoi counliios. China oxhiLils a piogiossiyoly smalloi
ago cohoil oyoi limo as a iosull of ils sliicl family planning policy. As a iosull. lho iolaliyo lighlnoss of
lho maiiiago maikol foi Chinoso mon whon compaioo lo lhoii counloipails in olhoi counliios is likoly
lo Lo woiso lhan whal is iopiosonloo Ly lhis sox ialio. Fuilhoimoio. lho Chinoso sox ialios al Liilh in
1000 ano 200ò aio oslimaloo lo Lo 1.1ò ano 1.20. iospocliyoly (soo Woi ano Zhang. 2000). 1his implios
lhal lho sox ialio foi lho pio-maiilal ago cohoil will likoly woison in lho foiosooaLlo fuluio.
Wo piosonl a soiios of iogiossions in 1aLlo 2. 1ho lisl column shows lhal lho ioal oxchango ialo
lonos lo Lo lowoi in pooioi counliios. 1his is commonly inloipioloo as conlimalion of lho Lalassa-
Samuolson olocl. In Column 2. wo aoo a pioxy foi lnancial ooyolopmonl Ly lho ialio of piiyalo socloi
ciooil lo GDI. 1ho posiliyo coomcionl on lho now iogiossoi inoicalos lhal counliios wilh a pooioi
lnancial syslom lono lo hayo a lowoi ILI. In Column 8. wo aoo lho sox ialio. 1ho coomcionl on
lho sox ialio is nogaliyo ano slalislically signilcanl. inoicaling lhal counliios wilh a highoi sox ialio
lono lo hayo a lowoi ILI. Sinco oil oxpoiling counliios hayo a cuiionl incomo lhal is likoly lo Lo
suLslanlially highoi lhan lhoii poimanonl incomo (unlil lhoy iun oul of lho oil iosoiyo). lhoii cuiionl
accounl ano ILI palloins may Lo oiloionl fiom olhoi oconomios. In Column 4. wo oxcluoo majoi
oil oxpoilois ano io-oo lho iogiossion. 1his luins oul lo hayo lilllo olocl on lho ioull. In pailicuai.
counliios wilh a highoi sox ialio conlinuo lo oxhiLil a lowoi ILI.
In Column ò of 1aLlo 2. wo aoo soyoial aooilional conliol yaiiaLlos: goyoinmonl lscal oolcil.

loims of liaoo. capilal accounl oponnoss. ano ooponooncy ialio. Duo lo missing yaluos foi somo of
lhoso yaiiaLlos. lho samplo sizo is oiamalically smalloi (a ooclino fiom 128 in Column 4 lo 7ò Column
ò). Of lhoso yaiiaLlos. lho ooponoonco ialio is lho only signilcanl yaiiaLlo. 1ho posiliyo coomcionl on
lho ooponoonco ialio (0.0008) moans lhal counliios wilh a low ooponooncy ialio (fowoi chiloion ano
ioliioos as a shaio of lho populalion) lono lo hayo a low ILI. Ly lho logic of lho lifo-cyclo hypolhosis.
a lowoi ooponooncy ialio piooucos a highoi sayings ialo. Ly lho moool in Soclion 2. lhis coulo loao lo
a ioouclion in lho yaluo of lho ioal oxchango ialo. Il is nolowoilhy. howoyoi. oyon wilh lhoso aooilional
conliols ano in a smalloi samplo. lho sox ialio olocl is slill slalislically signilcanl. allhough ils poinl
oslimalo is slighlly smalloi.
In Column 6 of 1aLlo 2. wo lako inlo accounl oxchango ialo iogimos using lho Ioinhail-Iogol
(2004) oo faclo iogimo classilcalions. Iolaliyo lo lho counliios on a lxoo oxchango ialo iogimo (lho
lofl oul gioup). lhoso on a ciawling pog appoai lo hayo a lowoi ILI. Counliios on olhoi cuiioncy
iogimos oo nol appoai lo hayo a syslomalically oiloionl ILI. Wilh lhoso conliols. lho nogaliyo olocl
of lho sox ialio on lho ILI is slill ioLusl. In Column 7. wo moasuio oxchango ialo iogimos Ly lho
oo faclo classilcalions pioposoo Ly Loyy Yoyali ano Sluizonnogoi (2008). Il luins oul lhis ooos nol
alocl lho iolalionship Lolwoon lho sox ialio ano lho ioal oxchango ialo.
In 1aLlo 8. wo io-oo lho iogiossions in 1aLlo 2 oxcopl lhal wo now moasuio a counliy`s lnancial
ooyolopmonl Ly lho lnancial syslom syslom sophislicalion inoox fiom lho GloLal Compoliliyonoss
Iopoil. 1ho iosulls aio Lioaoly similai lo 1aLlo 2. In pailiculai. lho coomcionls on lho sox ialio aio
nogaliyo in all lyo casos. ano aio signilcanl in foui of lho lyo casos. 1ho sox ialio coomcionl is (mai-
ginally) nol signilcanl in Column 6 of 1aLlo 8. whoio lho Ioinhail-Iogol oxchango ialo classilcalions
aio usoo as conliols. Wo nolo. howoyoi. lhal lhis iogiossion also has fai fowoi oLsoiyalions (8ò only).
which also iooucos lho powoi of lho losl. In any caso. whon lho LYS oxchango ialo classilcalions aio
usoo insloao (iopoiloo in Column 7). lho sox ialio coomcionl Locomos signilcanl again.
In 1aLlos 4 ano ò. wo oxamino lho iolalionship Lolwoon lho sox ialio ano lho (piiyalo-socloi)
cuiionl accounl. Locauso oui lhooiy ooos nol oiscuss goyoinmonl sayings Lohayioi. wo chooso lo
oolno lho ooponoonl yaiiaLlo as a counliy`s cuiionl accounl accounl (as a shaio of GDI) minus lho
goyoinmonl sayings (as a shaio of GDI). Olhoiwiso. lho iogiossion spocilcalions aio similai lo lhoso
in 1aLlos 2 ano 8. 1ho sox ialio has a posiliyo coomcionl which is slalislically signilcanl in almosl all
casos oxcopl whon lho samplo sizo Locomos yoiy small.
In sum. wo lno lhal lho sox ialio has a signilcanl impacl on lho ioal oxchango ialo ano cuiionl
accounl in a way consislonl wilh oui lhooiy: as lho sox ialio iisos. a counliy lonos lo hayo a ioal
oxchango ialo oopiocialion ano a cuiionl accounl suiplus. (An impoilanl cayoal is lhal wo oo nol
hayo a cloyoi iooa lo insliumonl foi lho sox ialio in lho cioss counliy conloxl: fuluio iosoaich will
hayo lo inyosligalo lho causalily moio lhoioughly.)
1o Lo cloai. as lho sox ialio imLalanco is a soyoio pioLlom only in a suLsol of counliios. il is
nol a koy funoamonlal foi lho ioal oxchango ialo in mosl counliios. Nonolholoss. foi lhoso counliios
wilh a soyoio sox ialio imLalanco. incluoing China. ono mighl nol hayo an accuialo yiow on lho
26
oouiliLiium oxchango ialo unloss ono lakos il inlo accounl. 1o illuslialo lho ouanlilaliyo signilcanco
of lho ompiiical iolalions. wo compulo lho oxlonl of lho Chinoso ioal oxchango ialo unooiyalualion
(oi lho yaluo of lho ILI iolaliyo lo whal can Lo piooicloo Lasoo on lho funoamonlals) Ly laking
lho poinl oslimalos in Columns 1-2 ano ò of 1aLlos 2-ò. iospocliyoly. al lhoii faco yaluo. 1ho iosulls
aio laLulaloo in 1aLlo 6. As noloo oailioi. iolaliyo lo lho simplo-minooo III. lho Chinoso oxchango
ialo is unooiyaluoo Ly aLoul 4ò/. Onco wo aojusl foi lho Lalassa-Samuolson olocl. lho oxlonl of lho
unooiyalualion Locomos òò/ (column 1 of 1aLlo 6) - appaionlly lho Chinoso ILI is oyon lowoi lhan
olhoi counliios al lho compaiaLlo incomo loyol. If wo aooilionally consiooi lnancial unooiooyolopmonl
(pioxioo Ly lho ialio of piiyalo socloi loans lo GDI). lho Chinoso ILI unooiyalualion is iooucoo
lo 48/ (column 2. iow 1 of 1aLlo 6). which is slill oconomically signilcanl. If wo also lako inlo
accounl goyoinmonl oolcil. loims of liaoo. ano capilal accounl oponnoss. lho oxlonl of lho ILI
unooiyalualion is 8ò/ (column 8. iow 1). If wo fuilhoi lako inlo accounl lho ooponooncy ialio. lho
oxlonl of unooiyalualion oiops lo 18/ (column 4. iow 1). Finally. if wo aoo lho sox ialio olocl.
lho oxlonl of unooiyalualion Locomos 8/ (column ò. iow 1 of 1aLlo 6). 1ho lasl numLoi iopiosonls a
iolaliyoly liiyial amounl of unooiyalualion sinco majoi oxchango ialos (o.g.. lho ouio´oollai ialo oi lho
yon´oollai ialo) coulo oasily luclualo Ly moio lhan 8/ in a yoai. If wo pioxy lnancial ooyolopmonl
Ly lho ialing of lnancial syslom sophislicalion. ano also lako inlo accounl lho sox ialio olocl ano
olhoi sliucluial yaiiaLlos. lho oxlonl of lho Chinoso ILI unooiyalualion Locomos 2/ (column ò. iow
2 of 1aLlo 6). an oyon smalloi amounl.
Wo can oo similai calculalions foi lho Chinoso (piiyalo socloi) cuiionl accounl (as a shaio of
GDI) in oxcoss of lho funoamonlals. If wo only lako inlo lho iogulaiily lhal pooioi counliios lono
lo hayo a lowoi cuiionl accounl Lalanco. lho Chinoso oxcoss CA is on lho oiooi of 14/. If wo lako
inlo accounl lho sox ialio olocl as woll as lnancial unooiooyolopmonl. lho ooponooncy ialio ano olhoi
yaiiaLlos in lho iogiossions. lho oxcoss amounl of cuiionl accounl Locomos somowhoio Lolwoon 0.8/
ano 2.0/. ooponoing on which pioxy foi lnancial ooyolopmonl is usoo. 1hoso numLois illuslialo lhal
lho sox ialio is a ouanlilaliyoly impoilanl sliucluial facloi. lhough il is nol lho only ono. In pailiculai.
lho ooponooncy ialio is also a yoiy impoilanl facloi. In any caso. if lhoso sliucluial faclois aio nol
lakon inlo accounl. ono mighl mislakonly oxaggoialo lho iolo of cuiioncy manipulalion in alocling
Lolh lho ILI ano lho cuiionl accounl.
6 ConcIusIon
A low yaluo of lho ioal oxchango ialo (i.o.. ooyialions fiom lho III fiom Lolow). a laigo cuiionl
accounl suiplus. ano accumulalion of foioign oxchango iosoiyo aio lho commonly usoo ciiloiia foi
juoging cuiioncy unooiyalualion oi manipulalion. Wo aiguo lhal nono of lhom is a logically souno cii-
loiion. Insloao. a oiamalic iiso in lho sox ialio foi lho piomaiilal ago cohoil in China sinco 2002. coulo
gonoialo Lolh a oopiocialion of lho ioal oxchango ialo ano a iiso in lho cuiionl accounl suiplus. Wilh
capilal conliols (incluoing manoaloiy suiionooi of foioign oxchango oainings). a poisislonl cuiionl
27
accounl suiplus can mochanically Lo conyoiloo inlo a iiso in a counliy`s foioign oxchango iosoiyo.
1ho usual naiialiyo aLoul lho Chinoso oxloinal oconomy connocls lho lhioo yaiiaLlos in lho
following way: 1ho aulhoiilios inloiyono aggiossiyoly in lho cuiioncy maikol in oiooi lo gonoialo an
aililcial unooiyalualion of ils cuiioncy. 1his gonoialos a iiso in lho foioign oxchango iosoiyo holoings
ano a fall in lho ioal oxchango ialo. As a iosull of lho cuiioncy unooiyalualion. lho counliy managos
lo pioouco a cuiionl accounl suiplus. 1ho moool ano lho oyioonco in lhis papoi oncouiago lho ioaooi
lo consiooi an alloinaliyo way lo connocl lho lhioo yaiiaLlos: sliucluial faclois. such as a iiso in lho
sox ialio. simullanoously gonoialo a iiso in lho cuiionl accounl (lhiough a iiso in lho sayings ialo)
ano a fall in lho ioal yaluo of lho oxchango ialo. 1ho low ioal oxchango ialo is nol lho causo of lho
cuiionl accounl suiplus. Wilh manoaloiy suiionooi of foioign oxchango oainings ioouiioo of Ly lho
counliy`s capilal conliol iogimo. lho cuiionl accounl suiplus is conyoiloo passiyoly inlo an incioaso in
lho conlial Lank`s foioign oxchango iosoiyo holoings.
If olhoi faclois. in aooilion lo a iiso in lho sox ialio. hayo also conliiLuloo lo a iiso in lho
Chinoso sayings ialo. such as a ioouclion in lho ooponooncy ialio. oi a iiso in lho coipoialo ano
goyoinmonl sayings ialos. lhoy can complomonl lho sox ialio olocl ano ioinfoico an appoaianco of an
unooiyaluoo cuiioncy oyon whon lhoio is no manipulalion. 1o Lo cloai. lhis papoi is nol saying lhal
no manipulalions hayo occuioo. Insloao. il illuslialos polonlial pilfalls in assossing lho oouiliLiium
oxchango ialo whon impoilanl sliucluial faclois aio nol accounloo foi.
Lmpiiically. counliios wilh a high sox ialio oo appoai lo hayo a low yaluo of lho ioal oxchango
ialo ano a cuiionl accounl suiplus. If wo lako lho oconomoliic poinl oslimalos al faco yaluo. il appoais
lhal lho Chinoso ioal oxchango ialo has only a iolaliyoly small amounl of unooiyalualion (2-8/) onco
wo lako inlo accounl lho sox ialio olocl ano olhoi sliucluial faclois.
In fuluio iosoaich. lho moool coulo Lo oxlonooo lo allow foi onoogonous aojuslmonl of lho sox
ialio. 1his will holp us lo assoss lho spooo of lho ioyoisal of lho sox ialio ano lho unwinoing of lho
cuiionl accounl suiplus ano cuiioncy 'unooiyalualion.'
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82
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
-0.4
-0.3
-0.2
-0.1
0
0.1
sex ratio
R
E
R

d
e
p
r
e
c
i
a
t
i
o
n
RER depreciation vs sex ratio, kappa=0.8
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
0.12
0.14
0.16
0.18
0.2
0.22
sex ratio
S
a
v
i
n
g
s

r
a
t
e
Aggregate savings rate vs sex ratio, kappa=0.8
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
0
0.02
0.04
0.06
0.08
0.1
sex ratio
C
A
/
G
D
P
CA/GDP vs sex ratio, kappa=0.8
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
Figure 1: RER, aggregate savings rate, CA/GDP vs sex ratio, no labor supply effect, kappa=0.8
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
-0.4
-0.3
-0.2
-0.1
0
0.1
sex ratio
R
E
R

d
e
p
r
e
c
i
a
t
i
o
n
RER depreciation vs sex ratio, kappa=0.7
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
0.12
0.14
0.16
0.18
0.2
0.22
sex ratio
S
a
v
i
n
g
s

r
a
t
e
Aggregate savings rate vs sex ratio, kappa=0.7
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
0
0.02
0.04
0.06
0.08
0.1
sex ratio
C
A
/
G
D
P
CA/GDP vs sex ratio, kappa=0.7
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
Figure 2: RER, aggregate savings rate, CA/GDP vs sex ratio, no labor supply effect, kappa=0.7
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
-0.4
-0.3
-0.2
-0.1
0
0.1
sex ratio
R
E
R

d
e
p
r
e
c
i
a
t
i
o
n
RER depreciation vs sex ratio, kappa=0.9
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
0.12
0.14
0.16
0.18
0.2
0.22
sex ratio
S
a
v
i
n
g
s

r
a
t
e
Aggregate savings rate vs sex ratio, kappa=0.9
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
-0.02
0
0.02
0.04
0.06
0.08
0.1
sex ratio
C
A
/
G
D
P
CA/GDP vs sex ratio, kappa=0.9
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
Figure 3: RER, aggregate savings rate, CA/GDP vs sex ratio, no labor supply effect, kappa=0.9
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
-0.4
-0.3
-0.2
-0.1
0
0.1
sex ratio
R
E
R

d
e
p
r
e
c
i
a
t
i
o
n
RER depreciation vs sex ratio, kappa=0.8
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
0.12
0.14
0.16
0.18
0.2
0.22
0.24
0.26
sex ratio
S
a
v
i
n
g
s

r
a
t
e
Aggregate savings rate vs sex ratio, kappa=0.8
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
0
0.02
0.04
0.06
0.08
0.1
sex ratio
C
A
/
G
D
P
CA/GDP vs sex ratio, kappa=0.8
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
Figure 4: RER, aggregate savings rate, CA/GDP vs sex ratio, with labor supply effect,
kappa=0.8
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
-0.4
-0.3
-0.2
-0.1
0
0.1
sex ratio
R
E
R

d
e
p
r
e
c
i
a
t
i
o
n
RER depreciation vs sex ratio, kappa=0.7
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
0.12
0.14
0.16
0.18
0.2
0.22
0.24
0.26
sex ratio
S
a
v
i
n
g
s

r
a
t
e
Aggregate savings rate vs sex ratio, kappa=0.7
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
0
0.02
0.04
0.06
0.08
0.1
sex ratio
C
A
/
G
D
P
CA/GDP vs sex ratio, kappa=0.7
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
Figure 5: RER, aggregate savings rate, CA/GDP vs sex ratio, with labor supply effect,
kappa=0.7
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
-0.4
-0.3
-0.2
-0.1
0
0.1
sex ratio
R
E
R

d
e
p
r
e
c
i
a
t
i
o
n
RER depreciation vs sex ratio, kappa=0.9
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
0.12
0.14
0.16
0.18
0.2
0.22
0.24
0.26
sex ratio
S
a
v
i
n
g
s

r
a
t
e
Aggregate savings rate vs sex ratio, kappa=0.9
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 1.5
0
0.02
0.04
0.06
0.08
0.1
sex ratio
C
A
/
G
D
P
CA/GDP vs sex ratio, kappa=0.9
x=2, sigma=0.01, p=0.02
x=0.5, sigma=0.01, p=0.02
x=2, sigma=0.05, p=0.02
x=2, sigma=0.01, p=0.05
Figure 6: RER, aggregate savings rate, CA/GDP vs sex ratio, with labor supply effect,
kappa=0.9
0 2 4 6 8 10 12 14 16 18 20
-0.12
-0.1
-0.08
-0.06
-0.04
-0.02
0
sex ratio
R
E
R

d
e
p
r
e
c
i
a
t
i
o
n
RER depreciation
b=2.72
b=2
b=4
0 2 4 6 8 10 12 14 16 18 20
0.24
0.26
0.28
0.3
0.32
0.34
0.36
sex ratio
S
a
v
i
n
g
s

r
a
t
e
Aggregate savings rate
b=2.72
b=2
b=4
0 2 4 6 8 10 12 14 16 18 20
0
0.02
0.04
0.06
0.08
0.1
sex ratio
C
A
/
G
D
P
Non-governmental CA/GDP
b=2.72
b=2
b=4
Figure 7: Impulse responses of RER, aggregate savings rate and CA/GDP, ʏ=20
Table 1: Summary statistics, 2004-2008 average
Variable  Mean  Median  Standard deviation  Min value  Max value 
Ln(RER)  ‐0.74  ‐0.80  0.59  ‐2.22  0.41 
(Private Sector) Current account  ‐3.63  ‐2.93  9.32  ‐31.51  26.91 
Real GDP per capita (US$)  12986  7747  13733  367  77057 
Private credit (% of GDP)  56.63  38.70  52.26  2.08  319.72 
Financial system sophistication  3.78  3.66  0.79  2.52  5.28 
Sex ratio  1.04  1.04  0.02  1.00  1.13 
Fiscal deficit (% of GDP)  ‐1.47  ‐0.37  5.98  ‐25.98  11.38 
Terms of trade  113  102  33.8  70.0  205.8 
Capital account openness  0.53  0.118  1.64  ‐1.83  2.50 
Dependency ratio  60.75  54.84  17.64  28.47  107.60 
! The real exchange rate data is obtained from Penn World Tables 6.3. The variable “p” (called “price level of GDP”) in the Penn World Tables is
equivalent to the real exchange rate relative to the US dollar: A lower value of p means a depreciation in the real exchange rate.
! Private Sector Current account = current account to GDP ratio minus the government savings to GDP ratio.
! For the ratio of private credit (% of GDP), we follow Allen, Qian and Qian (2004) and modify the measure for China by multiplying 0.2 to the credit to
GDP ratio. This is to correct for the fact that only 20% of the bank loans go to private firms. Financial system sophistication from the Global
Competitiveness Report is another measure for the financial development.
! Fiscal deficit data is obtained from IFS database. Terms of trade index is defined as the ratio of export price index to the import price index, which is
from Worldbank database. We use the capital account openness index in Chinn and Ito (2008) to measure the degree of capital controls. A higher value
means less capital control. Dependency ratio data can be obtained from Worldbank database.

Table 2: Ln(real exchange rate) and the sex ratio, using private credit to GDP ratio as the measure of financial development 
 
(1) 
All 
countries 
(2) 
All 
countries 
(3) 
All 
countries 
(4) 
Excluding major 
oil exporters 
(5) 
Excluding major 
oil exporters 
(6) 
Excluding major 
oil exporters 
(7) 
Excluding major 
oil exporters 
Sex ratio 
   
‐4.290**  ‐4.012**  ‐3.193*  ‐3.408**  ‐3.500** 
     
(1.667)  (1.713)  (1.797)  (1.568)  (1.754) 
Ln(GDP per capita)  0.318**  0.190**  0.236**  0.233**  0.360**  0.402**  0.359** 
 
(0.030)  (0.038)  (0.041)  (0.044)  (0.073)  (0.063)  (0.073) 
Private credit (% of GDP) 
 
0.004**  0.004**  0.004**  0.003**  0.002**  0.002** 
   
(0.001)  (0.001)  (0.001)  (0.001)  (0.001)  (0.001) 
Fiscal deficit 
       
‐0.007  0.002  ‐0.005 
         
(0.009)  (0.008)  (0.009) 
Terms of trade 
       
0.0002  ‐0.001  0.0003 
         
(0.001)  (0.001)  (0.001) 
Capital account openness 
       
0.060**  0.029  0.058** 
         
(0.027)  (0.024)  (0.027) 
Dependency ratio 
       
0.009**  0.010**  0.008* 
         
(0.004)  (0.004)  (0.004) 
Crawling peg (RR) 
         
‐0.397** 
 
           
(0.075) 
 
Managed floating (RR) 
         
‐0.036 
 
           
(0.077) 
 
Free floating (RR) 
         
‐0.081 
 
           
(0.119) 
 
Intermediate (LYS) 
           
‐0.078 
             
(0.092) 
Float (LYS) 
           
‐0.145* 
             
(0.085) 
Observations  142  132  132  123  92  89  92 
R‐squared  0.444  0.542  0.564  0.579  0.706  0.801  0.716 
Dependent variable = ln(RER). Standard errors are in parentheses, ** p<0.05, * p<0.1 
Table 3: Ln(real exchange rate) and the sex ratio, using financial system sophistication as the measure of financial development
 
(1) 
All 
countries 
(2) 
All 
countries 
(3) 
All 
countries 
(4) 
Excluding major 
oil exporters 
(5) 
Excluding major 
oil exporters 
(6) 
Excluding major 
oil exporters 
(7) 
Excluding major 
oil exporters 
Sex ratio 
   
‐6.192**  ‐6.255**  ‐5.051*  ‐4.664*  ‐4.430 
     
(1.964)  (1.995)  (2.500)  (2.802)  (2.908) 
Ln(GDP per capita)  0.318**  0.480**  0.443**  0.447**  0.529**  0.526**  0.531** 
 
(0.030)  (0.082)  (0.077)  (0.088)  (0.123)  (0.119)  (0.127) 
Financial system sophistication 
 
0.170*  0.252**  0.245**  0.099  0.034  0.086 
   
(0.089)  (0.086)  (0.099)  (0.110)  (0.121)  (0.116) 
Fiscal deficit 
       
‐0.022  ‐0.014  ‐0.025 
         
(0.015)  (0.015)  (0.017) 
Terms of trade 
       
‐0.004  ‐0.006**  ‐0.005 
         
(0.003)  (0.003)  (0.003) 
Capital account openness 
       
0.063  0.058  0.073 
         
(0.042)  (0.047)  (0.047) 
Dependency ratio 
       
0.014**  0.017**  0.017* 
         
(0.007)  (0.007)  (0.008) 
Crawling peg (RR) 
         
‐0.285* 
 
           
(0.147) 
 
Managed floating (RR) 
         
0.045 
 
           
(0.102) 
 
Free floating (RR) 
         
0.053 
 
           
(0.173) 
 
Intermediate (LYS) 
           
‐0.052 
             
(0.137) 
Float (LYS) 
           
0.044 
             
(0.125) 
Observations  142  54  54  49  43  42  43 
R‐squared  0.444  0.748  0.791  0.797  0.844  0.866  0.845 
! Dependent variable = log(RER). Standard errors are in parentheses, ** p<0.05, * p<0.1 
Table 4: Non-governmental CA/GDP vs sex ratio, using private credit to GDP ratio as the measure of financial development 
 
(1) 
All 
countries 
(2) 
All 
countries 
(3) 
All 
countries 
(4) 
Excluding major 
oil exporters 
(5) 
Excluding major 
oil exporters 
(6) 
Excluding major 
oil exporters 
(7) 
Excluding major 
oil exporters 
Sex ratio 
   
66.43*  78.43**  134.7**  111.6**  94.24 
     
(37.09)  (36.65)  (37.52)  (56.43)  (56.51) 
Ln(GDP per capita)  2.025**  3.683**  2.964**  2.050**  4.941**  4.035  3.834 
 
(0.639)  (0.876)  (0.957)  (0.975)  (1.529)  (3.415)  (3.115) 
Private credit (% of GDP) 
 
‐0.048**  ‐0.046**  ‐0.030*  ‐0.054**  ‐0.053**  ‐0.051** 
   
(0.018)  (0.018)  (0.018)  (0.018)  (0.025)  (0.024) 
Fiscal deficit 
       
0.079  ‐0.031  0.101 
         
(0.187)  (0.379)  (0.345) 
Terms of trade 
       
0.021  0.127  0.131* 
         
(0.029)  (0.076)  (0.076) 
Capital account openness 
       
‐0.315  ‐0.017  ‐0.081 
         
(0.563)  (1.508)  (1.353) 
Dependency ratio 
       
0.175*  0.209  0.439 
         
(0.089)  (0.745)  (0.720) 
Share of working age people 
         
0.163  0.797 
           
(1.884)  (1.885) 
Social security expenditure (% of GDP) 
         
0.137  0.115 
           
(0.250)  (0.233) 
Crawling peg (RR) 
         
3.413 
 
           
(3.694) 
  Managed floating (RR) 
         
0.957 
 
           
(2.840) 
  Free floating (RR) 
         
1.556 
 
           
(5.730) 
  Intermediate (LYS) 
           
1.789 
             
(2.911) 
Float (LYS) 
           
0.117 
             
(2.469) 
Continent dummies  N  N  N  N  N  Y  Y 
Observations  130  127  127  120  91  47  48 
R‐squared  0.073  0.125  0.147  0.121  0.275  0.543  0.532 
Table 5: Non-governmental CA/GDP vs sex ratio, using financial system sophistication as the measure of financial development 
 
(1) 
All 
countries 
(2) 
All 
countries 
(3) 
All 
countries 
(4) 
Excluding major 
oil exporters 
(5) 
Excluding major 
oil exporters 
(6) 
Excluding major 
oil exporters 
(7) 
Excluding major 
oil exporters 
Sex ratio 
   
103.3**  77.57**  129.6**  51.98  13.34 
     
(43.29)  (37.42)  (52.89)  (96.33)  (80.39) 
Ln(GDP per capita)  2.025**  1.715  2.327  ‐0.470  2.009  3.752  ‐0.194 
 
(0.639)  (1.744)  (1.688)  (1.641)  (2.613)  (5.031)  (3.845) 
Financial system sophistication 
 
‐0.925  ‐2.290  0.876  ‐0.477  4.029  3.480 
   
(1.889)  (1.896)  (1.861)  (2.337)  (3.336)  (2.951) 
Fiscal deficit 
       
‐0.185  0.081  0.385 
         
(0.313)  (0.533)  (0.512) 
Terms of trade 
       
0.039  ‐0.070  0.0772 
         
(0.055)  (0.118)  (0.105) 
Capital account openness 
       
‐0.103  ‐1.300  ‐0.569 
         
(0.879)  (2.619)  (1.765) 
Dependency ratio 
       
0.251  0.167  ‐1.807 
         
(0.150)  (5.527)  (2.375) 
Share of working age people 
         
0.125  ‐3.446 
           
(12.23)  (5.400) 
Social security expenditure (% of GDP) 
         
0.056  ‐0.092 
           
(0.302)  (0.257) 
Crawling peg (RR) 
         
7.405 
 
           
(5.893) 
  Managed floating (RR) 
         
2.020 
 
           
(3.055) 
  Free floating (RR) 
         
‐8.510 
 
           
(7.890) 
  Intermediate (LYS) 
           
7.626** 
             
(3.571) 
Float (LYS) 
           
‐3.593 
             
(4.050) 
Continent dummies  N  N  N  N  N  Y  Y 
Observations  130  54  54  49  43  32  33 
R‐squared  0.073  0.023  0.123  0.118  0.200  0.478  0.505 
 
Table 6: Real exchange rate undervaluation and excess current account: The Case of China

 
% of RER undervaluation  Excess (non‐governmental) current account 
 
(1) 
Only BS 
 
(2) 
FD+BS 
 
(3) 
Add GD 
+TT+KA 
(4) 
Add 
DR 
(5) 
Add 
SR 
(1) 
Only BS 
 
(2) 
FD+BS 
 
(3) 
Add GD 
+TT+KA 
(4) 
Add 
DR 
(5) 
Add 
SR 
Financial development index 
Private credit (% of GDP)  55.26  43.45  35.44  17.91  7.86  13.52  12.06  11.39  8.97  2.01 
Financial system sophistication   55.26  46.38  31.31  16.78  2.24  13.52  10.26  10.11  7.97  0.37 

Notes:
A. Excess RER undervaluation = model prediction – actual log RER. (A positive number describes % undervaluation).
B. Excess current account = private sector current account (i.e., current account net of government savings) – model prediction;
C. The five columns include progressively more regresors:
! (1) The only regressor (other than the intercept) is log income, a proxy for the Balassa-Samuelson (BS) effect;
! (2) Add financial development (FD) to the list of regressors;
! (3) Add government fiscal deficit (GD), terms of trade (TT), and capital account openness (KA);
! (4) Add the dependence ratio (DR);
! (5) Add the sex ratio (SR)
D. The last two rows correspond to estimates when two different proxies for financial development are used. The first row uses the ratio of
credit to the private sector to GDP, and the second row uses an index of local financial system sophistication from the Global
Competitiveness Report.
 


A IrooI oI IroposItIon 1 {not Ior puLIIcatIon)
IrooI. Wo lolally oiloionlialo lho syslom ano hayo
\

¸
¸
¸
¸
¸
d:
|
dn
|
d1
Þ|
d1
Þ|
¸

=

¸
¸
¸
¸
¸
.
l
.
2
.
3
.
d
¸

whoio
\
ll
= (n

l
÷1n

2
)
n

1
|
. \
l2
= \
l3
= \
ld
= 0
\
2l
= n
|
. \
22
= ÷(1 ÷:
|
). \
23
=
¹
Þ|
1
o
1
Þ|
1
lo
1
Þ|
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
. \
2d
=
1
Þ|
(1 ÷c
Þ

Þ|
1
o
1
Þ|
1
o
1
Þ|
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
\
3l
= \
33
= 0. \
32
= ÷1. \
3d
=

c
T
1 ÷c
T

lo

(1 ÷c
T

T|
1
o

T|
(1 ÷1
Þ|
)
o

l
\
dl
= 0. \
d2
= ÷1. \
d3
=
n
|
1
Þ|
. \
dd
= ÷

c
T
1 ÷c
T

lo

(1 ÷c
T

T|
1
o

T|
(1 ÷1
Þ|
)
o
1
l
ano
.
l
= ÷1n

2
. .
2
= .
3
= .
d
= 0
1ho ooloiminanl of maliix \ is
ool(\) = \
ll
ool

¸
¸
\
22
\
23
\
2d
\
32
\
33
\
3d
\
d2
\
d3
\
dd
¸

ano
ool

¸
¸
\
22
\
23
\
2d
\
32
\
33
\
3d
\
d2
\
d3
\
dd
¸

= nogaliyo .tcr:: ÷(1 ÷:
|
)

n
|
1
Þ|

2
1 ÷c
T
1
T
÷

n
|
1
Þ|

1 ÷c
T
1
T|
÷
1 ÷c
Þ
1
Þ|

C
Þ|
Sinco lho consumplion on lho nonliaoaLlo gooos Ly lho young cohoil musl Lo loss lhan lho aggiogalo
nonliaoaLlo gooo consumplion. il follows lhal (1 ÷:
|
)n
|
< 1
Þ|
C
Þ|
. 1hoiofoio.
ool

¸
¸
\
22
\
23
\
2d
\
32
\
33
\
3d
\
d2
\
d3
\
dd
¸

< 0
1
ano ool(\) 0
1hon il is oasy lo show lhal
d:
|
d
=
ool

¸
¸
¸
¸
¸
.
l
\
l2
\
l3
\
ld
.
2
\
22
\
23
\
2d
.
3
\
32
\
33
\
3d
.
d
\
d2
\
d3
\
dd
¸

ool(\)
=
.
l
\
ll
0
ano lho piico of lho nonliaoaLlo gooo
d1
Þ|
d
=
ool

¸
¸
¸
¸
¸
\
ll
\
l2
.
l
\
ld
\
2l
\
22
.
2
\
2d
\
3l
\
32
.
3
\
3d
\
dl
\
d2
.
d
\
dd
¸

ool(\)
=
.
l
\
2l
\
32
(\
dd
÷\
3d
)
ool(\)
< 0
1ho laLoi inpul in lho nonliaoaLlo socloi
d1
Þ|
d
=
ool

¸
¸
¸
¸
¸
\
ll
\
l2
\
l3
.
l
\
2l
\
22
\
23
.
2
\
3l
\
32
\
33
.
3
\
dl
\
d2
\
d3
.
d
¸

ool(\)
= ÷
.
l
\
2l
\
32
\
3d
ool(\)
< 0
In poiioo t ÷1. lho shock has Loon oLsoiyoo. (2.2) ano (2.4) holo in oouiliLiium. Ly solying (2.2).
(2.8). (2.4) ano (2.ò). wo hayo
1
Þ|
= 1
c
1
c

c

ano 1
|÷l
= 1
~(c
1
c

)
c

which moans lhal afloi ono poiioo lho shock occuis. lho piico of lho nonliaoaLlo gooo ano lho consumoi
piico inoox will go Lack lo lhoii inilial loyols. As foi lho cuiionl accounl.

|
= 1
Þ|
Q
Þ|
÷Q
T|
÷ (1 ÷1) ·1¹
|l
÷1
|
C
|
÷1
|÷l
whoio ·1¹
|l
is lho nol foioign assol holoings in poiioo t ÷ 1 ano 1
|÷l
is lho sum of capilal inpul
in Lolh lho nonliaoaLlo socloi ano lho liaoaLlo socloi in poiioo t ÷ 1. Sinco
:
|l
n
|l
= ·1¹
|l
÷1
|
1hon

|
= :
|
n
|
÷:
|l
n
|l
÷^1
|÷l
2
whoio ^1
|÷l
= 1
|÷l
÷1
|
. 1ho oomano foi lho nonliaoaLlo gooo is now
Q
Þ,|÷l
=
n((1 ÷1) :
|
÷ 1)
1
Þ
whoio wo oiop lho limo suLinoox Locauso wago ialo ano lho iolaliyo piico of lho nonliaoaLlo gooo
will go Lack lo lhoii inilial loyols. Il is oasy lo soo lhal sinco :
|
:
|l
. Q
Þ,|÷l
Q
Þ,|l
.
As c
Þ
< c
T
. lho nonliaoaLlo socloi has a lowoi capilal-inlonsily lhan lho liaoaLlo socloi. 1hon.
in poiioo t ÷ 1. 1
|÷l
< 1
|l
.
In poiioo t ÷ 1.
¹
Þ|
1
o
1
Þ,|÷l
1
lo
1
Þ,|÷l
=
n((1 ÷1) :
|
÷ 1)
1
Þ,|÷l
In lho oouiliLiium. all maikols cloai ano wo can oLlain
1
|÷l
=
c
T
÷(c
T
÷c
Þ
) [(1 ÷1):
|
÷ 1[
(1 ÷c
T
)1
n
ano lhon

|
= :
|
n
|
÷:
|l
n ÷
(c
T
÷c
Þ
)(1 ÷1) (:
|
÷:
|l
)
(1 ÷c
T
)1
n
1o show
Jc.
Jo
0. wo only nooo lo show
J(susu)
Jo
0. Ono sumcionl conoilion foi lho
inooualily is
:
|
1
Þ|
:
|l
1
Þ|
1o show lhis inooualily. wo jusl nooo lo show
:
|
d1
Þ|
d
÷1
Þ|
d:
|
d
0
which moans
d1
Þ|
´d
d:
|
´d
÷
1
Þ|
:
|
0
Ilugging lho oxpiossions of
J1
1
Jo
ano
Js
Jo
. wo hayo
d1
Þ|
d:
|
÷
1
Þ|
:
|
=
÷(1 ÷:
|
)n
|
C
Þ|

u
1
1

lo

J

÷
lo
1
J
1

÷1
Þ|
C
Þ|

u
1
1

lo

J

÷
lo
1
J
1

:
|
posiliyo .tcr::
÷ posiliyo .tcr:
=
(1
Þ|
C
Þ|
÷(1 ÷:
|
)n
|
)

u
1
1

lo

J

÷
lo
1
J
1

:
|
posiliyo .tcr::
÷ posiliyo .tcr:
As shown aLoyo. 1
Þ|
C
Þ|
÷(1 ÷:
|
)n
|
0. lhon
Jc.
Jo
0. in poiioo t. lho counliy will oxpoiionco a
cuiionl accounl suiplus.
8
H IrooI oI IroposItIon 2 {not Ior puLIIcatIon)
IrooI. If omolional ulililios aio laigo onough. whon c = 1. oi c is closo lo ono. wo hayo \
I
\
I
n
(i = n. :). Sinco
l
2
_ i _ 1.
i(1:
n
n
|
÷1:
u
n
|
) max (1:
u
n
|
. 1:
n
n
|
)
which moans lhal wilhin lho noighLoihooo of c = 1. wo hayo in

2n
< n

2n,n
.
Wo piocooo in lwo slops. In lho lisl slop. wo assumo lhal inooualily in

2n
< n

2n,n
holos foi all
yaluos of c. ano pioyo lhal a highoi sox ialio loaos lo a highoi sayings ialo. In lho socono slop. wo
pioyo Ly conliaoiclion lhal lho inooualily inoooo holos foi all yaluos of c.
Wo lolally oiloionlialo lho syslom ano hayo
\

¸
¸
¸
¸
¸
¸
¸
d:
u
|
d:
n
|
dn
|
d1
Þ|
d1
Þ|
¸

=

¸
¸
¸
¸
¸
¸
¸
.
l
.
2
.
3
.
d
.
5
¸

whoio
\
ll
=
¸
n

lu
÷(1 ÷j)i
2
1n

2u

1 ÷
1
c
÷'(:
nIn
)1(:
nIn
)

÷j1n

2u,n

n

1
|
\
l2
= (1 ÷j)i
2
1n

2u
¸
1 ÷
1
c
÷'(:
nIn
)1(:
nIn
)

n

1
|
\
ld
= (1 ÷o)

(1 ÷j)in

2u
¸
1 ÷
1
c
÷'(:
nIn
)1(:
nIn
)

÷jn

2u,n

11
Þ|
1
|÷l
. \
l3
= \
l5
= 0
\
2l
= (1 ÷j)i
2
¸

c
n
÷ 1) ÷1

'(:
nIn
)

n
2n
÷:
nIn
÷n
2n,n

n

2n
1 ÷1
n

2u
n

2n
:
nax
÷:
nIn

n

1
|
\
22
=
n
|
1
|
¸
i
2
1c
n
n

2n
÷i
2
n

2n
1 ÷1in

2u
1

'(:
nIn
)

(in

2n
÷n

2n,n
)
÷i
2
1n

2u
1

'(:
nIn
)

n
2n
÷:
nIn
÷n
2n,n

÷n

ln
¸
÷ [j ÷ (1 ÷j)(1 ÷c
n
)[ 1n

2n,n
n
|
1
|
\
23
= 1in

2u
1

'(:
nIn
)

(n
2n
÷n
2n,n
)
1 ÷o
n
|
\
2d
= (1 ÷o)

(1 ÷j)

ic
n
n

2n
÷in

2u
1

'(:
nIn
)

n
2n
÷:
nIn
÷n
2n,n

÷[(1 ÷c
n
) (1 ÷j) ÷j[ n

2n,n

11
Þ|
1
|÷l
. \
25
= 0
4
\
3l
=
n
|
1 ÷c
. \
32
=
cn
|
1 ÷c
. \
33
= ÷(1 ÷:
|
). \
3d
=
¹
Þ|
1
o
1
Þ|
1
lo
1
Þ|
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
. \
35
=
1
Þ|
(1 ÷c
Þ

Þ|
1
o
1
Þ|
1
o
1
Þ|
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
\
dl
= \
d2
= 0. \
d3
= ÷1. \
dd
= 0. \
d5
=

c
T
1 ÷c
T

lo

(1 ÷c
T

T|
1
o

T|
(1 ÷1
Þ|
)
o

l
\
5l
= \
52
= 0. \
53
= ÷1. \
5d
=
n
|
1
Þ|
. \
55
= ÷

c
Þ
1 ÷c
Þ

lo

(1 ÷c
Þ

Þ|
1
o
1
Þ|
1
Þ|
o
1
l
ano
.
l
= 0. .
2
= (1 ÷j)
0c
n
0c
(n

2n
(:) ÷in

2n
) . .
3
= ÷
n
|
(:
n
|
÷:
u
|
)
1 ÷c
. .
d
= .
5
= 0
If wo assumo lho ulilily funclion is log. n(C) = ln(C). lhon \
ld
= \
23
= \
2d
= 0. ano
ool(\) = ool

\
ll
\
l2
\
2l
\
22

ool

¸
¸
\
33
\
3d
\
35
\
d3
\
dd
\
d5
\
53
\
5d
\
55
¸

Il is oasy lo show lhal
ool

\
ll
\
l2
\
2l
\
22

0
ano
ool

¸
¸
\
33
\
3d
\
35
\
d3
\
dd
\
d5
\
53
\
5d
\
55
¸

= nogaliyo .tcr:: ÷(1 ÷:
|
)

n
|
1
Þ|

2
1 ÷c
T
1
T
÷

n
|
1
Þ|

1 ÷c
T
1
T|
÷
1 ÷c
Þ
1
Þ|

C
Þ|
Nolico lhal lho consumplion on lho nonliaoaLlo gooos Ly lho young cohoil musl Lo loss lhan lho
aggiogalo nonliaoaLlo gooo consumplion. lhon (1 ÷:
|
)n
|
< 1
Þ|
C
Þ|
. 1hoiofoio.
ool

¸
¸
\
33
\
3d
\
35
\
d3
\
dd
\
d5
\
53
\
5d
\
55
¸

< 0
ano ool(\) < 0
1hon
d:
n
|
dc
=
.
2
\
ll
ool

\
ll
\
l2
\
2l
\
22
0 ano
d:
u
|
dc
=
.
2
\
l2
ool

\
ll
\
l2
\
2l
\
22
< 0
ò
ano lho aggiogalo sayings ialo Ly lho young cohoil :
|
=
c
l÷c
:
n
|
÷
l
l÷c
:
u
|
.
d:
|
dc
=
c
1 ÷c
d:
n
|
dc
÷
1
1 ÷c
d:
u
|
dc
÷
:
n
|
÷:
u
|
(1 ÷c)
2
0
As foi lho piico of lho nonliaoaLlo gooo.
d1
Þ|
dc
= ÷
.
3
u

1
1
o

J

ool

¸
¸
\
33
\
3d
\
35
\
d3
\
dd
\
d5
\
53
\
5d
\
55
¸

÷
.
2
(\
ll
\
32
÷\
l2
\
3l
)
u
1
1
o

J

ool(\)
Il is oasy lo show lhal \
ll
\
32
÷\
l2
\
3l
< 0. ano sinco .
2
< 0.
J1
1
Jc
< 0. which iosulls in a fall in lho
consumplion piico inoox ano lhoiofoio a ioal oxchango ialo oopiocialion in poiioo t.
As foi lho cuiionl accounl.

|
= 1
Þ|
Q
Þ|
÷Q
T|
÷ (1 ÷1) ·1¹
|l
÷1
|
C
|
÷1
|÷l
whoio ·1¹
|l
is lho nol foioign assol holoings in poiioo t ÷ 1 ano 1
|÷l
is lho sum of capilal inpul
in Lolh lho nonliaoaLlo socloi ano lho liaoaLlo socloi in poiioo t ÷ 1.
Nolico lhal
:
|l
n
|l
= ·1¹
|l
÷1
|
1hon

|
= :
|
n
|
÷:
|l
n
|l
÷^1
|÷l
whoio ^1
|÷l
= 1
|÷l
÷1
|
. Ly OLslfolo ano Iogol (100ò). if lho sox ialio iomains conslanl c afloi
poiioo t. lho piico of lho nonliaoaLlo gooo will go Lack lo ils inilial loyol. which moans lhal ioal
oxchango ialo will appiocialo in poiioo t ÷ 1. In lhis poifocl foiosighl solup. whon lims mako lhoii
oplimal oocisions. ooualions (2.2) ano (2.4) holo. If wo lako lho log ulilily funclion. lho aggiogalo
sayings ialo Ly lho young cohoil will iomain samo afloi poiioo t.
1ho oomano foi lho nonliaoaLlo gooo is now
Q
Þ,|÷l
=
n((1 ÷1) :
|
÷ 1)
1
Þ,|÷l
whoio wo oiop lho limo suLinoox Locauso wago ialo ano lho iolaliyo piico of lho nonliaoaLlo gooo
will go Lack lo lhoii inilial loyols. Il is oasy lo soo lhal sinco :
|
:
|l
. Q
Þ,|÷l
Q
Þ,|l
.
As in OLslfolo ano Iogol (100ò). wo assumo lhal c
Þ
< c
T
. lho nonliaoaLlo socloi has a lowoi
capilal-inlonsily lhan lho liaoaLlo socloi. 1hon. in poiioo t ÷ 1. 1
|÷l
< 1
|l
.
6
In poiioo t ÷ 1.
¹
Þ|
1
o
1
Þ,|÷l
1
lo
1
Þ,|÷l
=
n((1 ÷1) :
|
÷ 1)
1
Þ,|÷l
In lho oouiliLiium. all maikols cloai ano wo can oLlain
1
|÷l
=
¸
c
T
(1 ÷c
T
)
÷

c
T
1 ÷c
T
÷
c
Þ
1 ÷c
Þ

((1 ÷1): ÷ 1)

n
1
ano lhon
^1
|÷l
=

c
T
1 ÷c
T
÷
c
Þ
1 ÷c
Þ

(1 ÷1) (:
|
÷:
|l
)
n
1

|
= :
|
n
|
÷:
|l
n ÷

c
T
1 ÷c
T
÷
c
Þ
1 ÷c
Þ

(1 ÷1) (:
|
÷:
|l
)
n
1
1o show
Jc.
Jc
0. wo only nooo lo show
J(susu)
Jc
0. Ly (8.0). ono sumcionl conoilion
is foi lho inooualily is
:
|
1
Þ|
:
|l
1
Þ|
1o show lhis inooualily. wo jusl nooo lo show
:
|
d1
Þ|
dc
÷1
Þ|
d:
|
dc
0
which moans
d1
Þ|
´dc
d:
|
´dc
÷
1
Þ|
:
|
0
Ilugging lho oxpiossions of
J1
1
Jc
ano
Js
Jc
. wo hayo
d1
Þ|
d:
|
÷
1
Þ|
:
|
=
÷(1 ÷:
|
)n
|
C
Þ|

u
1
1

lo

J

÷
lo
1
J
1

÷1
Þ|
C
Þ|

u
1
1

lo

J

÷
lo
1
J
1

:
|
posiliyo .tcr::
÷ posiliyo .tcr:
=
(1
Þ|
C
Þ|
÷(1 ÷:
|
)n
|
)

u
1
1

lo

J

÷
lo
1
J
1

:
|
posiliyo .tcr::
÷ posiliyo .tcr:
As shown aLoyo. 1
Þ|
C
Þ|
÷(1 ÷:
|
)n
|
0. lhon
Jc.
Jc
0. in poiioo t. lho counliy will oxpoiionco a
cuiionl accounl suiplus.
1ho impacl of a iiso in lho sox ialio on lho social wolfaio is
0l
u
0c
= n
|

1
1
|÷l
1
|

(1 ÷j)in

2u
÷jn

2u,n

÷n

lu

d:
u
dc
(L.1)
÷(1 ÷j)

n
|
1
1
|÷l
1
|
in

2u
d:
n
dc
÷
1 [:[
c
2

(1 ÷j)

n
|
i1
1
|÷l
1
|
n

2u

d:
n
dc
÷
d:
u
dc

÷

c
2
1 [:[

0
7
0l
n
0c
= n
|

÷n

ln
÷1
1
|÷l
1
|
ic(1 ÷j)n

2n
÷1
1
|÷l
1
|
[(1 ÷j)c ÷ (1 ÷c)[ n

2n,n

d:
n
dc
÷(1 ÷j)

n
|
1
1
|÷l
1
|
icn

2u
d:
u
dc
÷

do
dc

n
2n
÷n
2n,n
÷:
nIn

÷
d

uu

1

(n
r
)JJ(n
r
)

dc
¸
¸

(L.2)
< (1 ÷j)

n
|
1
1
|÷l
1
|
icn

2u
d:
u
dc
÷

c
2

n
2n
÷n
2n,n
÷:
nIn

÷

c
2
1 [:[

< 0
whoio lho lisl inooualily in (L.1) holos Locauso
÷n

lu
÷ (1 ÷j)1
1
|÷l
1
|
in

2u
÷j1
1
|÷l
1
|
n

2u,n
= ÷(1 ÷j)1
1
|÷l
1
|
in

2n
¸
1
c
÷'(:
nIn
)1(:
nIn
)

< 0
ano lho lisl inooualily in (L.2) holos Locauso
÷n

ln
÷1
1
|÷l
1
|
i(1 ÷j)(1 ÷c)n

2n
÷1
1
|÷l
1
|
j(1 ÷c)n

2n,n
= ÷(1 ÷j)1
1
|÷l
1
|
in

2u

n
2n
÷:
nIn
÷n
2n,n
:
nax
÷:
nIn

< 0
Wo now show Ly conliaoiclion lhal in

2n
< n

2n,n
musl holo foi all cs. Supposo nol. lhon
in

2n
< n

2n,n
may fail somolimo. Duo lo conlinuily of .
2
. lhoio oxisls a loyol of sox ialio c
0
al which
in

2n
= n

2n,n
. which implios lhal .
2
= 0.
As in Du ano Woi (2010). wo can show lhal
.
2

c=c

= 0 ano
d
|
.
2
dc
|

c=c

= 0 foi any / 0
which moans lhal .
2
= 0 foi all cs. 1his conliaoicls lho assumplion lhal .
2
< 0 whon c = 1.
1hoiofoio. lho inooualily in

2n
< n

2n,n
holos foi all cs.
C IrooI oI IroposItIon 3 {not Ior puLIIcatIon)
IrooI. If n(C) = lnC. foi c < c
l
. Ly lho oplimal laLoi supply conoilion. wo hayo
0 <
d1
I
|
d:
I
|
=
1
1 ÷:
I
|
·

I
1
I
|
·

I
÷·

I
1
I
|
(C.1)
8
whoio i = n. :.
\

¸
¸
¸
¸
¸
¸
¸
d:
u
|
d:
n
|
dn
|
d1
Þ|
d1
Þ|
¸

=

¸
¸
¸
¸
¸
¸
¸
.
l
.
2
.
3
.
d
.
5
¸

whoio
\
ll
=
¸
n

lu
÷(1 ÷j)i
2
1n

2u

1 ÷
1
c
÷'(:
nIn
)1(:
nIn
)

÷j1n

2u,n

n

1
u
|
1
|
÷
¸
÷(1 ÷:
|
)n

lu
÷(1 ÷j)i
2
1:
u
|
n

2u

1 ÷
1
c
÷'(:
nIn
)1(:
nIn
)

÷j1:
u
|
n

2u,n

n

1
|
d1
u
|
d:
u
|
\
l2
= (1 ÷j)i
2
1n

2u

1 ÷
1
c
÷'(:
nIn
)1(:
nIn
)

1
n
|
÷:
n
|
d1
n
|
d:
n
|

n

1
|
. \
l3
= \
ld
= \
l5
= 0
\
2l
= (1 ÷j)i
2
¸
(

c
n
÷ 1) ÷1

'(:
nIn
)

n
2n
÷:
nIn
÷n
2n,n

n

2n
1 ÷1
n

2u
n

2n
:
nax
÷:
nIn

1
u
|
÷:
u
|
d1
u
|
d:
u
|

n

1
|
\
22
=
n
|
1
|
¸
i
2
n

2n
1 ÷1in

2u
1

'(:
nIn
)

(in

2n
÷n

2n,n
)
÷i
2
1n

2u
1

'(:
nIn
)

n
2n
÷:
nIn
÷n
2n,n

÷n

ln
¸

1
n
|
÷:
n
|
d1
n
|
d:
n
|

÷(1 ÷:
n
|
)n

ln
n
|
1
|
d1
n
|
d:
n
|
÷ [j ÷ (1 ÷j)(1 ÷c
n
)[ 1n

2n,n

1
n
|
÷:
n
|
d1
n
|
d:
n
|

n
|
1
|
\
23
= \
2d
= \
25
= 0
\
3l
=
n
|
1 ÷c

1
u
|
÷:
u
|
d1
u
|
d:
u
|

. \
32
=
cn
|
1 ÷c

1
n
|
÷:
n
|
d1
n
|
d:
n
|

\
33
= ÷
¸
(1 ÷:
u
|
)1
u
|
1 ÷c
÷
c(1 ÷:
n
|
)1
n
|
1 ÷c

. \
3d
=
¹
Þ|
1
o
1
Þ|
1
lo
1
Þ|
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
. \
35
=
1
Þ|
(1 ÷c
Þ

Þ|
1
o
1
Þ|
1
o
1
Þ|
c
o
1
Þ
(1 ÷c
Þ
)
lo
1
\
dl
= ÷
c
T
n
|
l
l÷c
1
u
|
÷
c
l÷c
1
n
|
÷1
Þ|
1
1 ÷c
d1
u
|
d:
u
|
. \
d2
= ÷
c
T
n
|
l
l÷c
1
u
|
÷
c
l÷c
1
n
|
÷1
Þ|
c
1 ÷c
d1
n
|
d:
n
|
\
d3
= ÷1. \
dd
= 0. \
d5
=

c
T
1 ÷c
T

lo

(1 ÷c
T

T|
1
o

T|

1
1 ÷c
1
u
|
÷
c
1 ÷c
1
n
|
÷1
Þ|

o

l
\
5l
= \
52
= 0. \
53
= ÷1. \
5d
=
n
|
1
Þ|
. \
55
= ÷

c
Þ
1 ÷c
Þ

lo
1
(1 ÷c
Þ

Þ|
1
o
1
Þ|
1
Þ|
o
1
l
ano
.
l
= 0. .
2
= (1 ÷j)
0c
n
0c
(n

2n
(:) ÷in

2n
) . .
3
= ÷
n
|
(:
n
|
1
n
|
÷:
u
|
1
u
|
)
1 ÷c
.
d
=
c
T
n
|
l
l÷c
1
u
|
÷
c
l÷c
1
n
|
÷1
Þ|
1
n
|
÷1
u
|
(1 ÷c)
2
. .
5
= 0
0
1ho ooloiminanl of maliix \ is
ool(\) = ool

\
ll
\
l2
\
2l
\
22

ool

¸
¸
\
33
\
3d
\
35
\
d3
\
dd
\
d5
\
53
\
5d
\
55
¸

Il is oasy lo show lhal
ool

\
ll
\
l2
\
2l
\
22

0
ano
ool

¸
¸
\
33
\
3d
\
35
\
d3
\
dd
\
d5
\
53
\
5d
\
55
¸

= nogaliyo .tcr:: ÷
¸
(1 ÷:
u
|
)1
u
|
1 ÷c
÷
c(1 ÷:
n
|
)1
n
|
1 ÷c

n
|
1
Þ|

2
1 ÷c
T
1
T
÷

n
|
1
Þ|

1 ÷c
T
1
T|
÷
1 ÷c
Þ
1
Þ|

C
Þ|
Nolico lhal lho consumplion on lho nonliaoaLlo gooos Ly lho young cohoil musl Lo loss lhan lho
aggiogalo nonliaoaLlo gooo consumplion. lhon

(ls
r

)J
r

l÷c
÷
c(ls
r

)J
r

l÷c

n
|
< 1
Þ|
C
Þ|
. 1hoiofoio.
ool

¸
¸
\
33
\
3d
\
35
\
d3
\
dd
\
d5
\
53
\
5d
\
55
¸

< 0
ano ool(\) < 0
1hon
d:
n
|
dc
= ÷
.
2
\
ll
ool

\
ll
\
l2
\
2l
\
22
0 ano
d:
u
|
dc
=
.
2
\
l2
ool

\
ll
\
l2
\
2l
\
22
< 0
Ly (C.1). wo hayo
d1
n
|
dc
0 ano
d1
u
|
dc
< 0
1ho aggiogalo sayings ialo Ly lho young cohoil :
|
=
c
l÷c
:
n
|
÷
l
l÷c
:
u
|
.
d:
|
dc
=
c
1 ÷c
d:
n
|
dc
÷
1
1 ÷c
d:
u
|
dc
÷
:
n
|
÷:
u
|
(1 ÷c)
2
0
1ho aggiogalo laLoi supply in poiioo t
d1
|
dc
=
c
1 ÷c
d1
n
|
d:
n
|
d:
n
|
dc
÷
1
1 ÷c
d1
u
|
d:
u
|
d:
u
|
dc
÷
1
n
|
÷1
u
|
(1 ÷c)
2
Unooi lho assumplion
u

J
u

is non-oocioasing in 1. Ly (C.1).
JJ
r

Js
r

JJ
r

Js
r

. lhon wo hayo
JJ
Jc
0. which
10
moans lho aggiogalo laLoi supply is incioasing in lho sox ialio.
As foi lho piico of lho nonliaoaLlo gooo.
d1
Þ|
dc
= ÷
.
3

u

1
1

o

J

÷.
d
(\
3d
\
55
÷\
35
\
5d
)
ool

¸
¸
\
33
\
3d
\
35
\
d3
\
dd
\
d5
\
53
\
5d
\
55
¸

÷
.
2
(\
ll
\
32
÷\
l2
\
3l
)
u

1
1
o

J

ool(\)
Il is oasy lo show lhal \
3d
\
55
÷\
35
\
5d
< 0. lhon
J1
1
Jc
< 0. which iosulls in a fall in lho consumplion
piico inoox ano lhoiofoio a ioal oxchango ialo oopiocialion in poiioo t.
As foi lho cuiionl accounl.

|
= 1
Þ|
Q
Þ|
÷Q
T|
÷ (1 ÷1) ·1¹
|l
÷1
|
C
|
÷1
|÷l
whoio ·1¹
|l
is lho nol foioign assol holoings in poiioo t ÷ 1 ano 1
|÷l
is lho sum of capilal inpul
in Lolh lho nonliaoaLlo socloi ano lho liaoaLlo socloi in poiioo t ÷ 1.
Nolico lhal
:
|l
n
|l
1
|l
= ·1¹
|l
÷1
|
1hon

|
=

:
u
|
1
u
|
1 ÷c
÷
c:
n
|
1
n
|
1 ÷c

n
|
÷:
|l
n
|l
1
|l
÷^1
|÷l
whoio ^1
|÷l
= 1
|÷l
÷ 1
|
. Following OLslfolo ano Iogol (100ò). if lho sox ialio iomains conslanl
al c afloi poiioo t. lho piico of lho nonliaoaLlo gooo will go Lack lo ils inilial loyol. which moans
lhal lho ioal oxchango ialo will appiocialo in poiioo t ÷ 1. In lhis poifocl foiosighl solup. whon lims
mako lhoii oplimal oocisions. ooualions (2.2) ano (2.4) holo. If wo lako lho log ulilily funclion. lho
aggiogalo sayings ialo Ly lho young cohoil will iomain lho samo afloi poiioo t.
1ho oomano foi lho nonliaoaLlo gooo is now
Q
Þ,|÷l
=
n

(1 ÷1)

s
r

l÷c
÷
cs
r

l÷c

÷ 1

1
Þ,|÷l
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12

Sex Ratios and Exchange Rates Qingyuan Du and Shang-Jin Wei NBER Working Paper No. 16788 February 2011 JEL No. F31,F41 ABSTRACT A rise in the sex ratio (increasing relative surplus of men in the marriage market) in China and several other economies, in theory, can simultaneously generate a decline in the real exchange rate (RER) and a rise in the current account surplus. We demonstrate this logic through both a savings channel and an effective labor supply channel. In this model, a low RER is not a cause of the current account surplus, nor is it a consequence of currency manipulations. Empirically, those economies with a high sex ratio tend to have a low real exchange rate, beyond what can be explained by the Balassa-Samuelson effect, financial underdevelopment, dependence ratio, and exchange rate regime classifications. Once these factors are accounted for, the Chinese real exchange rate is estimated to be undervalued by only a relatively trivial amount. Qingyuan Du Economics Department Columbia University qingyuandu@gmail.com Shang-Jin Wei Graduate School of Business Columbia University Uris Hall 619 3022 Broadway New York, NY 10027-6902 and NBER shangjin.wei@columbia.edu

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45 1.4 x=2.35 1.02 x=0.7 0.05 1 1.35 1.4 1.01.22 0.5 Savings rate 0 x=2.2 0.05 1 1.4 1.7 . kappa=0.35 1.02 x=2.25 1.02 x=0.04 0. CA/GDP vs sex ratio. sigma=0.01. p=0.05.05 1 1.02 x=2.2 1.05 1.2 1.05 1.18 0.01.2 0.3 1. sigma=0. p=0.4 1.02 x=2. p=0. sigma=0. no labor supply effect.5 sex ratio Figure 2: RER. sigma=0.5.01.2 1.35 1.01. sigma=0. p=0.1 1.1 1. p=0. sigma=0.14 0.25 1.16 0. p=0.8 0.04 0.02 x=2.02 x=2. sigma=0.5 sex ratio sex ratio CA/GDP vs sex ratio. sigma=0.RER depreciation vs sex ratio.5 sex ratio sex ratio CA/GDP vs sex ratio. sigma=0. sigma=0.05 1 1.02 x=2. p=0. kappa=0.01.05 1. p=0.2 1.06 0.02 x=2.01.3 1.2 1.1 -0.02 0 x=2.01.5.02 x=0.7 Aggregate savings rate vs sex ratio.5.01.15 1.22 0. p=0. sigma=0.02 x=0.01.08 CA/GDP 0.15 1.02 x=2.5 sex ratio Figure 1: RER.25 1. sigma=0.02 x=0.1 1.1 1.2 -0.45 1.25 1. p=0. sigma=0.3 1.05 1 1.8 0. p=0. p=0.4 x=2. p=0. kappa=0. p=0.15 1.25 1.5 Savings rate 0 x=2.3 1.3 -0. sigma=0.05 1.01.08 CA/GDP 0. p=0.05. kappa=0. p=0.3 1.35 1.05 1. p=0.02 x=0. aggregate savings rate. sigma=0.1 0.1 -0.01.45 1.4 1.15 1.02 x=2.15 1. p=0.01. p=0.45 1.25 1.35 1. sigma=0.05.5. CA/GDP vs sex ratio.05. p=0.16 0.7 0.1 0.01.1 1. sigma=0. kappa=0. sigma=0. sigma=0.12 RER depreciation -0. aggregate savings rate.14 0.01. p=0.1 0. p=0.45 1. sigma=0.05 1. sigma=0.18 0. kappa=0. kappa=0.4 1. sigma=0. sigma=0.02 x=2. no labor supply effect.8 Aggregate savings rate vs sex ratio.02 0 x=2.06 0.5.02 x=2.01.3 -0.05 1 1. p=0.1 0.8 RER depreciation vs sex ratio.4 1.15 1.45 1.05.3 1. p=0.01.02 x=2.2 -0. sigma=0.5. kappa=0.2 1.01.05.12 RER depreciation -0.1 1.

25 1. p=0.3 -0.4 1. p=0. kappa=0.35 1.45 1. p=0.06 0.1 0. sigma=0.05 1 1.01.05.3 1.5 sex ratio Figure 3: RER. kappa=0. sigma=0. p=0. p=0. no labor supply effect.9 0.2 0.05 1.05 1 1.8 0.25 1. sigma=0.1 1. sigma=0.2 1. kappa=0.05. sigma=0.1 0.25 1.08 CA/GDP 0.1 1.01. kappa=0.12 RER depreciation -0.RER depreciation vs sex ratio.05 1 1.05 1. sigma=0.01.05 1. aggregate savings rate. p=0.24 0.02 x=0.02 x=0.05 1 1. p=0.05.25 1.02 x=2. kappa=0.22 0.15 1.02 x=2. sigma=0.35 1.2 1.01. sigma=0.4 x=2. p=0.04 0. sigma=0.4 1. sigma=0.16 0.15 1.02 x=0.35 1.4 1.02 x=2.01.5 sex ratio sex ratio CA/GDP vs sex ratio.01.5 Savings rate 0 x=2.02 x=0. sigma=0. p=0. p=0. sigma=0. p=0.5. p=0.18 0.02 x=2.45 1.1 -0.8 Aggregate savings rate vs sex ratio. p=0.26 RER depreciation Savings rate 0 -0. sigma=0.02 x=2. p=0. sigma=0. sigma=0.3 -0.3 1.2 1.01.02 x=0.4 1.15 1.01.5 sex ratio Figure 4: RER.2 -0.02 x=2. sigma=0.01.01.5. p=0.18 0.45 1.02 0 x=2.12 sex ratio sex ratio CA/GDP vs sex ratio.4 1.2 1. aggregate savings rate.15 1.25 1. p=0.25 1.05.05 0.1 1.14 x=2. p=0. p=0.01.45 1.45 1.2 1.01.2 0. sigma=0.2 1.22 0.35 1.4 x=2.08 CA/GDP 0.05 1.02 x=2.5 1 1.01. CA/GDP vs sex ratio.01.04 0.5 0.5. p=0.4 1.5.02 x=2. p=0.05 1.02 x=2.2 -0.3 1.9 RER depreciation vs sex ratio.05 1 1.1 0. p=0.02 0 -0.8 . sigma=0. kappa=0.1 0.05.3 1.1 1.1 1. kappa=0.45 1. kappa=0.9 Aggregate savings rate vs sex ratio. p=0. sigma=0.14 0. with labor supply effect.01.3 1. p=0.1 -0.02 x=0.01.16 0.01.01.05.35 1.5.06 0.02 x=2.15 1.1 1.05 1.02 x=2. sigma=0.35 1.8 0.15 1.02 x=2. sigma=0.02 x=2.5. p=0. sigma=0.3 1. sigma=0.9 0. CA/GDP vs sex ratio. sigma=0.

2 1.25 1.24 0. sigma=0.3 1.5.1 -0.3 -0.02 x=2.15 1. sigma=0.4 1. sigma=0.01.02 0 x=2.02 x=0. p=0. p=0.35 1.01. sigma=0. p=0.05 1 1.02 x=2.9 . p=0. p=0. sigma=0.5 sex ratio sex ratio CA/GDP vs sex ratio. aggregate savings rate.1 0.01.02 x=2.01.4 1.2 -0.7 Aggregate savings rate vs sex ratio.05.9 0.01. p=0.4 x=2.1 0.02 x=2.06 0.18 0.24 0.15 1. sigma=0.3 1. p=0. sigma=0.2 1.05 1. kappa=0.1 1.02 x=2. sigma=0.05.18 0.01.02 x=0.45 1.05 0.01.04 0. kappa=0. p=0.05 0.1 1.9 Aggregate savings rate vs sex ratio. p=0.3 -0.35 1.5 sex ratio Figure 5: RER.9 0.01.1 1. kappa=0. sigma=0.5 1 1.05 1 1.05 1 1. sigma=0.05 1.01.15 1. p=0. p=0.5.01. p=0.25 1.04 0.5 sex ratio Figure 6: RER.05. sigma=0.25 1. sigma=0. sigma=0. p=0.5 0. sigma=0.15 1.7 0.2 0.14 x=2. sigma=0. p=0.05.35 1.45 1. p=0.3 1.4 x=2.05 1.12 sex ratio sex ratio CA/GDP vs sex ratio. sigma=0.1 0.01.1 -0. p=0.02 x=0.1 1.5.2 1.02 x=0.2 1. sigma=0. sigma=0. p=0.12 x=2. sigma=0.45 1.45 1.5.05 1. p=0.26 RER depreciation Savings rate 0 -0.35 1. kappa=0.01. p=0. aggregate savings rate.16 0.3 1.45 1. p=0. p=0.2 0. kappa=0.15 1. kappa=0.3 1.05.14 1 1. with labor supply effect.35 1. p=0.25 1.1 1.2 -0.4 1.01.5 0.26 RER depreciation Savings rate 0 -0.16 0.4 1.05 1.5.3 1.02 x=2. sigma=0.7 RER depreciation vs sex ratio.22 0.5.08 CA/GDP 0.45 1.1 0.08 CA/GDP 0.RER depreciation vs sex ratio. kappa=0. CA/GDP vs sex ratio.2 1.22 0. p=0.35 1.01.4 1.01.02 x=2. with labor supply effect.1 1.01.02 x=2.2 1. sigma=0.02 x=0.4 1.05 1.02 x=2.02 x=0.05 1 1.02 x=2. sigma=0.02 0 x=2.01. sigma=0.15 1. kappa=0. CA/GDP vs sex ratio.02 x=2. sigma=0.25 1.06 0.01. p=0.25 1.02 x=2.05.7 0.

06 -0. aggregate savings rate and CA/GDP.28 0.06 0.36 0.08 CA/GDP 0. =20 .72 b=2 b=4 0 2 4 6 8 10 12 14 16 18 20 sex ratio Figure 7: Impulse responses of RER.1 0.RER depreciation 0 -0.04 -0.72 b=2 b=4 0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20 sex ratio sex ratio Non-governmental CA/GDP 0.72 b=2 b=4 0.02 0 b=2.24 b=2.32 0.04 0.3 0.26 0.02 b=2.1 -0.08 -0.12 Savings rate 0.34 Aggregate savings rate RER depreciation -0.

83  28.93  7747  38.2 to the credit to GDP ratio.80  ‐2.0  ‐1.8  1.98  70. Private Sector Current account = current account to GDP ratio minus the government savings to GDP ratio.118  54. A higher value means less capital control. The variable “p” (called “price level of GDP”) in the Penn World Tables is equivalent to the real exchange rate relative to the US dollar: A lower value of p means a depreciation in the real exchange rate.64  17.8  2.32  13733  52.52  1. which is from Worldbank database.38  205.66  1. Qian and Qian (2004) and modify the measure for China by multiplying 0. For the ratio of private credit (% of GDP).84  Standard deviation  0.59  9.64  Min value  ‐2.79  0. Financial system sophistication from the Global Competitiveness Report is another measure for the financial development.98  33.53  60.47  113  0.Table 1: Summary statistics.08  2. Fiscal deficit data is obtained from IFS database. We use the capital account openness index in Chinn and Ito (2008) to measure the degree of capital controls.78  1. This is to correct for the fact that only 20% of the bank loans go to private firms.72  5.22  ‐31.60  The real exchange rate data is obtained from Penn World Tables 6.37  102  0.04  ‐0.91  77057  319.04  ‐1. ! .74  ‐3.51  367  2.02  5.70  3.13  11.47  Max value  0.75  Median  ‐0.41  26. we follow Allen.63  12986  56. Terms of trade index is defined as the ratio of export price index to the import price index. 2004-2008 average Variable  Ln(RER)  (Private Sector) Current account  Real GDP per capita (US$)  Private credit (% of GDP)  Financial system sophistication  Sex ratio  Fiscal deficit (% of GDP)  Terms of trade  Capital account openness  Dependency ratio  ! ! ! Mean  ‐0.50  107.63  3. Dependency ratio data can be obtained from Worldbank database.00  ‐25.28  1.26  0.3.

085)                Observations  142  132  132  123  92  89  92  R‐squared  0.073)  (0.005  Fiscal deficit          (0.397**              (0.408**  ‐3.713)  (1.010**  0.0002  ‐0.359**  (0.060**  0.444  0.360**  0. Standard errors are in parentheses.077)                Free floating (RR)  ‐0.027)  (0.036              (0.801  0.564  0.058**  Capital account openness          (0.002**  0.667)  0. * p<0.318**  0.797)  (1.716  Dependent variable = ln(RER).041)  0.145*  Float (LYS)              (0.001)  (0.029  0.500**      (1.004)  (0.038)  (0.001)  (0.073)    Private credit (% of GDP)  0.004)            Crawling peg (RR)  ‐0.001)  (0.193*  ‐3.001)  (0.1  (1)  All  countries  (2)  All  countries  (3)  All  countries  ‐4.290**  (1.754)        Ln(GDP per capita)  0.001)      ‐0.063)  (0.004**  (0.007  0.706  0.236**  (0.001  0.081              (0.027)            Dependency ratio  0.008)  (0.001)  (0.024)  (0.012**  ‐3.004)  (0.030)  (0.402**  0.001)  .Table 2: Ln(real exchange rate) and the sex ratio.075)                Managed floating (RR)  ‐0.044)  (0. using private credit to GDP ratio as the measure of financial development  (4)  (5)  (6)  (7)  Excluding major  Excluding major  Excluding major  Excluding major  oil exporters  oil exporters  oil exporters  oil exporters    Sex ratio  ‐4.542  0.003**  0.002  ‐0.579  0.001)  (0.008*          (0. ** p<0.0003  Terms of trade          (0.078              (0.119)                Intermediate (LYS)  ‐0.004**  0.190**  0.002**    (0.568)  (1.001)            0.004**  0.009)            0.009)  (0.05.092)                ‐0.233**  0.009**  0.

866  0.015)  (0.008)            Crawling peg (RR)  ‐0.995)  (2.255**  ‐5.531**  (0.053              (0. * p<0. ** p<0.051*  ‐4.110)  (0.845  ! Dependent variable = log(RER).025  Fiscal deficit          (0.034  0.007)  (0.014  ‐0.017)            ‐0.015)  (0.05.089)  (0.529**  0.791  0.748  0.121)  (0.099  0.003)            0.844  0.252**  (0.797  0.077)  0.017**  0.073  Capital account openness          (0.082)  (0.480**  0.116)      ‐0.447**  0.430      (1.Table 3: Ln(real exchange rate) and the sex ratio.137)                0.318**  0.245**  0.006**  ‐0.044  Float (LYS)              (0.147)                Managed floating (RR)  0.014**  0.119)  (0.443**  (0.003)  (0.058  0.017*          (0.005  Terms of trade          (0.908)        Ln(GDP per capita)  0.125)                Observations  142  54  54  49  43  42  43  R‐squared  0.045              (0.004  ‐0.099)  (0.007)  (0.285*              (0.964)  0.802)  (2. using financial system sophistication as the measure of financial development (4)  (5)  (6)  (7)  Excluding major  Excluding major  Excluding major  Excluding major  oil exporters  oil exporters  oil exporters  oil exporters    Sex ratio  ‐6. Standard errors are in parentheses.500)  (2.030)  (0.1  (1)  All  countries  (2)  All  countries  (3)  All  countries  ‐6.003)  (0.052              (0.102)                Free floating (RR)  0.022  ‐0.047)            Dependency ratio  0.173)                Intermediate (LYS)  ‐0.063  0.664*  ‐4.047)  (0.123)  (0.526**  0.192**  (1.086)  .127)    Financial system sophistication  0.088)  (0.170*  0.042)  (0.444  0.086    (0.

131*  Terms of trade          (0.43*  78.081          (0.52)  (56.957)  (0.543  0.250)  (0.563)  (1.053**  ‐0.048**  ‐0.876)  (0.115            (0.797  Share of working age people            (1.030*  ‐0.Table 4: Non-governmental CA/GDP vs sex ratio.683**  2.43)  (56.275  0.415)  (3.024)  Fiscal deficit      0.127  0.745)  (0.730)    Intermediate (LYS)              1.911)  Float (LYS)                0.24      (37.079  ‐0.025**  3.021  0.051**  Private credit (% of GDP)    (0.413  Crawling peg (RR)            (3.089)  (0.439  Dependency ratio          (0.115)    ‐0.035  3.117              (2.050**  4.076)  (0.508)  (1.51)        Ln(GDP per capita)  2.125  0.639)  (0.187)  (0.315  ‐0.018)  (0.209  0.941**  4.964**  2.975)  (1. using private credit to GDP ratio as the measure of financial development  (1)  (2)  (3)  (4)  (5)  (6)  (7)  All  All  All  Excluding major  Excluding major  Excluding major  Excluding major  countries  countries  countries  oil exporters  oil exporters  oil exporters  oil exporters    Sex ratio  66.720)            0.046**  ‐0.054**  ‐0.233)              3.556              (5.345)            0.031  0.018)  (0.09)  (36.147  0.018)  (0.017  ‐0.532  .379)  (0.163  0.884)  (1.018)  (0.073  0.175*  0.834  (0.076)  Capital account openness            ‐0.43**  134.65)  (37.694)    Managed floating (RR)              0.353)            0.469)                Continent dummies  N  N  N  N  N  Y  Y  Observations  130  127  127  120  91  47  48  R‐squared  0.957              (2.529)  (3.840)    Free floating (RR)              1.101          (0.121  0.025)  (0.885)  Social security expenditure (% of GDP)              0.029)  (0.6**  94.7**  111.789                (2.137  0.

478  0.009  3.031)  (3.752  ‐0.118  0.890)        7.194  (1.533)  (0.477  4.688)  ‐2.505  .569    (0.123  (4)  (5)  (6)  (7)  Excluding major  Excluding major  Excluding major  Excluding major  oil exporters  oil exporters  oil exporters  oil exporters  77.375)    0.512)    0.639)      1.337)  (3.3**  (43.167  ‐1.185  0.105)    ‐0.118)  (0.571)        ‐3.336)  (2.593        (4.765)    0.055)  (0.103  ‐1.200  0.050)        N  N  Y  Y  49  43  32  33  0.290  (1.405      (5.257)      7.33)  (80.925  (1.29)  2.861)  (2.150)  (5.744)  ‐0.070  0.446      (12.300  ‐0.889)                                              N  54  0.023  (2)  All  countries  (3)  All  countries  103.57**  129.89)  (96.025**  (0.715  (1.039  ‐0.125  ‐3.385    (0.23)  (5.Table 5: Non-governmental CA/GDP vs sex ratio.029  3.055)        ‐8.879)  (2.613)  (5.092      (0.056  ‐0.876  ‐0.020        (3. using financial system sophistication as the measure of financial development  (1)  All  countries    Sex ratio    Ln(GDP per capita)    Financial system sophistication  Fiscal deficit      Terms of trade  Capital account openness      Dependency ratio    Share of working age people  Social security expenditure (% of GDP)      Crawling peg (RR)  Managed floating (RR)    Free floating (RR)    Intermediate (LYS)    Float (LYS)      Continent dummies  Observations  R‐squared                                                  N  130  0.807    (0.6**  51.641)  (2.073      2.626**          (3.34  (37.400)      0.251  0.510        (7.081  0.951)  ‐0.327  (1.42)  (52.893)        2.470  2.896)                                              N  54  0.98  13.845)  0.39)  ‐0.313)  (0.0772    (0.302)  (0.480  (1.619)  (1.527)  (2.

26  55.86  16.11  8. and capital account openness (KA). Excess RER undervaluation = model prediction – actual log RER.  Table 6: Real exchange rate undervaluation and excess current account: The Case of China   % of RER undervaluation  (4)  (3)  (2)  (1)  Only BS  FD+BS  Add GD  Add  +TT+KA  DR      55.52  13.78  2. The five columns include progressively more regresors: ! ! ! ! ! (1) The only regressor (other than the intercept) is log income.24  A.91  7. (5) Add the sex ratio (SR) D.45  46. B.06  10. C. a proxy for the Balassa-Samuelson (BS) effect. (A positive number describes % undervaluation).38  35.44  31. current account net of government savings) – model prediction.   . The first row uses the ratio of credit to the private sector to GDP. (4) Add the dependence ratio (DR). The last two rows correspond to estimates when two different proxies for financial development are used.31  Excess (non‐governmental) current account  (5)  (4)  (3)  (2)  (1)  (5)  Add  Add  Only BS  FD+BS  Add GD  Add  SR  DR  +TT+KA      SR  13.e. and the second row uses an index of local financial system sophistication from the Global Competitiveness Report.37    Financial development index  Private credit (% of GDP)  Financial system sophistication   Notes: 17.26  11. terms of trade (TT).01  0.97  2.52  12.97  7. Excess current account = private sector current account (i. (2) Add financial development (FD) to the list of regressors..39  10.26  43. (3) Add government fiscal deficit (GD).

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