Devaluation and income inequality: Evidence from Pakistan

Muhammad Shahbaz, Faridul Islam () and Butt Muhammad Sabihuddin

MPRA Paper from University Library of Munich, Germany

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; trade-openness; foreign direct investment (FDI); 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.

Keywords: Devaluation; Income Inequality; EKC; ARDL (search for similar items in EconPapers)
JEL-codes: F31 O1 (search for similar items in EconPapers)
Date: 2011-12-20, Revised 2011-12-21
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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