Rebalancing through expenditure and price changes

This paper puts forth a Neo-Kaleckian open economy model of two countries in order to investigate adjustment of US-China external imbalances. First, a stylized fixed mark-up model is presented, and discussed based on graphical analysis. Second, we present estimates of bilateral income and price elasticities of imports. Third, we employ the model for simulation analysis. Specifically, we randomly distribute expenditure change across government, investment and imports and calculate the exchange rate change necessary to lead to an equal change in the bilateral external imbalance. Doing so repeatedly allows to estimate probability distributions of endogenous variable changes.