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Inequality and Real Exchange Rates

Author

Listed:
  • Narayana Kocherlakota
  • Luigi Pistaferri

Abstract

Kocherlakota and Pistaferri (2007) describe two different models (Private Information Pareto Optimal and Incomplete Markets) of how households partially insure themselves against idiosyncratic shocks. They demonstrate that the models differ in terms of their implications for real exchange rates. In this paper, we use data from a wide range of countries, and document that there is a statististically significant relationship between real exchange rate growth and between-country differences in the growth rates of right-tail, but not left-tail, inequality growth. This finding is consistent with the Private Information Pareto Optimal model of partial insurance, but not the Incomplete Markets model. (JEL:F31, D30, D91 ) (c) 2008 by the European Economic Association.

Suggested Citation

  • Narayana Kocherlakota & Luigi Pistaferri, 2008. "Inequality and Real Exchange Rates," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 597-608, 04-05.
    • Handle: RePEc:tpr:jeurec:v:6:y:2008:i:2-3:p:597-608
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    Citations

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    Cited by:

    1. Raül Santaeulàlia-Llopis & Yu Zheng, 2018. "The Price of Growth: Consumption Insurance in China 1989–2009," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(4), pages 1-35, October.
    2. Kollmann, Robert, 2009. "Household Heterogeneity and the Real Exchange Rate: Still a Puzzle," CEPR Discussion Papers 7301, C.E.P.R. Discussion Papers.
    3. Vitor F. Luz & Carlos E. da Costa, 2011. "Separability and Memory: Micro Causes, Macro Consequences," 2011 Meeting Papers 916, Society for Economic Dynamics.
    4. Robert Kollmann, 2021. "Household Consumption Heterogeneity and the Real Exchange Rate," Working Papers ECARES 2021-14, ULB -- Universite Libre de Bruxelles.
    5. Costa, Carlos Eugênio da & Luz, Vitor Farinha, 2010. "The private memory of aggregate shocks," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 706, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    6. Hong-Ghi Min & Sang-Ook Shin & Judith A. McDonald, 2015. "Income Inequality and the Real Exchange Rate: Linkages and Evidence," Annals of Economics and Finance, Society for AEF, vol. 16(1), pages 115-141, May.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D30 - Microeconomics - - Distribution - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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