Inequality and Exchange Rate Movements in an Open-Economy Macroeconomic Model

Emilio Carnevali, Francesco Ruggeri and Marco Veronese Passarella

Review of Political Economy, 2024, vol. 36, issue 2, 722-760

Abstract: This article presents a complete macroeconomic (SFC) model to study income and wealth distribution in an open economy. We argue that exchange rates and the stock of foreign debt play a major role in shaping inequality across and within countries. Using the ‘relative income hypothesis’, we show that debt-financed consumption of low-income households can affect both total income and the disposable income of high-income households in the medium run. In addition, while higher inequality is detrimental to the domestic economy, it can benefit trading partners.

Date: 2024
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DOI: 10.1080/09538259.2022.2062961

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