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Devaluation and Income Inequality Nexus: Evidence from Pakistan

Author

Listed:
  • Muhammad Shahbaz

    (Department of Management Sciences, COMSATS Institute of Information Technology,Lahore, Pakistan)

  • Faridul Islam

    (Department of Finance and Economics, Utah Valley University, USA)

  • Muhammad Sabihuddin Butt

    (Applied Economic Research Centre, Karachi University, Karachi, Pakistan)

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.

Suggested Citation

  • Muhammad Shahbaz & Faridul Islam & Muhammad Sabihuddin Butt, 2013. "Devaluation and Income Inequality Nexus: Evidence from Pakistan," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 1(4), pages 48-58, April.
    • Handle: RePEc:ijr:journl:v:1:y:2013:i:4:p:48-58
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    References listed on IDEAS

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    Cited by:

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    3. repec:ipg:wpaper:2014-584 is not listed on IDEAS
    4. Bahmani-Oskooee, Mohsen & Motavallizadeh-Ardakani, Amid, 2018. "Exchange rate changes and income distribution in 41 countries: Asymmetry analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 266-282.

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    More about this item

    Keywords

    Devaluation; Income Inequality; EKC; ARDL;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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