Income Inequality and the Real Exchange Rate: Linkages and Evidence

Hong-Ghi Min, Sang-Ook Shin () and Judith McDonald ()
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Sang-Ook Shin: Department of Finance, Texas A&M University
Judith McDonald: Department of Economics, Lehigh University

Annals of Economics and Finance, 2015, vol. 16, issue 1, 115-141

Abstract: A simple model with non-homothetic preferences and purchasing-power par- ity for tradables shows that improved income inequality decreases the price of nontradables, resulting in a real depreciation. This hypothesized negative as- sociation between income inequality and the real exchange rate has robust empirical support from random- and fixed-effects models, dynamic panel es- timations, and panel vector autoregressions. Thus, policies that improve a country’s income distribution, by leading to a depreciation of the real ex- change rate, may improve the competitiveness of its goods. However, this income inequality-real exchange rate relationship does not imply that dra- matic redistributive policies will automatically bring about a real depreciation of the domestic currency.

Keywords: Income distribution; Gini coefficient; Price of nontradables; Real exchange rate; Real depreciation (search for similar items in EconPapers)
JEL-codes: F31 F32 O15 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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