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Inflation, currency depreciation and households balance sheet in Uruguay

Rodrigo Lluberas and Juan Odriozola

No 2015009, Documentos de trabajo from Banco Central del Uruguay

Abstract: The aim of this study is to analyze the effect of inflation and currency depreciation on wealth distribution in Uruguay. Previous empirical work either completely disregard assets denominated in foreign currency or do not consider the effect of changes in the nominal exchange rate on wealth redistribution. We take a different approach and study not only the effect of unexpected inflation but also of exchange rate movements in nominal wealth redistribution within the household sector. This is of particular importance in Uruguay due to the historical relevance of US dollar denominated assets and liabilities. Based on the recent history, we study three alternative scenarios. A 2002-crisis type scenario with a rate of currency depreciation higher than inflation, an early 2008-crisis type scenario with an appreciation of the peso and low inflation and a 2013-type scenario in which depreciation and inflation are roughly the same. A large proportion of household assets are real and most Uruguayan households do not own financial assets or debts. This results in small movements in households nominal positions after unexpected inflation or currency depreciation, particularly compared to similar studies for developed countries. Our results suggest that a crisis like the one experienced in 2002 with an annual inflation of 26% and a 93.5% devaluation of the currency results in an small increase in wealth inequality.

Keywords: inflation; nominal wealth; redistribution; households (search for similar items in EconPapers)
JEL-codes: D14 D31 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-mon and nep-net
Date: 2015
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