Income Inequality and the Real Exchange Rate: Linkages and Evidence

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A simple model with non-homothetic preferences and purchasing-power parity for tradables shows that improved income inequality decreases the price of nontradables, resulting in a real depreciation. This hypothesized negative association between income inequality and the real exchange rate has robust empirical support from random- and fixed-effects models, dynamic panel estimations, and panel vector autoregressions. Thus, policies that improve a country's income distribution, by leading to a depreciation of the real exchange rate, may improve the competitiveness of its goods. However, this income inequality-real exchange rate relationship does not imply that dramatic redistributive policies will automatically bring about a real depreciation of the domestic currency.
Publisher
WUHAN UNIV JOURNALS PRESS
Issue Date
2015-05
Language
English
Article Type
Article
Keywords

PANEL-DATA; TRADE; DETERMINANTS; INFLATION; MODELS

Citation

ANNALS OF ECONOMICS AND FINANCE, v.16, no.1, pp.115 - 141

ISSN
1529-7373
URI
http://hdl.handle.net/10203/200746
Appears in Collection
RIMS Journal Papers
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