Devaluation and Income Inequality Nexus: Evidence from Pakistan

Muhammad Shahbaz, Faridul Islam () and Muhammad Sabihuddin Butt
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Muhammad Sabihuddin Butt: Applied Economic Research Centre, Karachi University, Karachi, Pakistan

International Journal of Economics and Empirical Research (IJEER), 2013, vol. 1, issue 4, 48-58

Abstract: The paper examines the impact of nominal devaluation on income distribution in Pakistan. In the empirical model we include economic growth, measured per capita; tradeopenness; foreign direct investment; unemployment and inflation rates which appear well justified in the particular context of the economy of Pakistan. The Auto Regressive Distributed Lag (ARDL) bounds testing approach to cointegration has been employed for the long run relation; and the Vector Error Correction Model (VECM) for the short run dynamics. We also test the Kuznets inverted-U relation between income inequality and economic growth. We find long run relationship among the series; and that nominal devaluation worsens income inequality. Though economic growth appears to deteriorate income distribution, the non-linear link between the variables depicts Kuznets’ (1955) type inverted-U relationship. This is reassuring for Pakistan in the long run. We also find FDI and trade-openness worsens income distribution. Inflation lowers income inequality but unemployment aggravates it in Pakistan. This paperopens up new insights for policy makers to reduce income inequality in Pakistan.

Keywords: Devaluation; Income Inequality; EKC; ARDL (search for similar items in EconPapers)
JEL-codes: C22 F41 O15 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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