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Income Inequality and the Real Exchange Rate

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  • Pablo García

Abstract

In this paper I explore the effect of income inequality on the real exchange rate. I consider a version of the Salter-Swan model, where income inequality affects the real exchange rate through two general equilibrium channels: (i) the aggregation of individual demands derived from non-homothetic preferences; (ii) the workings of Samuelson-Balassa through the effect of inequality on the aggregation of human capital. If demand for non traded goods has an expenditure elasticity greater than one, and if tradables production is relatively intensive in human capital, then inequality has a non-monotonic effect on the level of the real exchange rate. Empirically, I find a strong relationship in levels between inequality and the bilateral real exchange rate. This partial correlation is large, significant, and positive in the case of within estimation and negative in the case of between estimation. I relate this finding to the expected short and long run effects of inequality on the real exchange rate, and the role factor endowments play in real exchange rate determination. I discuss the relationship of this fact with other strands of the literature, like the determinants of inequality, the effect of inequality on growth and the relevance of Samuelson-Balassa.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 54.

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Date of creation: Dec 1999
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Handle: RePEc:chb:bcchwp:54

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  1. Bourguignon, F. & Morrisson, C., 1990. "Income distribution, development and foreign trade : A cross-sectional analysis," European Economic Review, Elsevier, vol. 34(6), pages 1113-1132, September.
  2. Bhagwati, Jagdish N, 1984. "Why Are Services Cheaper in the Poor Countries?," Economic Journal, Royal Economic Society, vol. 94(374), pages 279-86, June.
  3. Hansen, Julia L. & Formby, John P. & Smith, W. James, 1996. "The Income Elasticity of Demand for Housing: Evidence from Concentration Curves," Journal of Urban Economics, Elsevier, vol. 39(2), pages 173-192, March.
  4. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  5. Dornbusch, Rudiger, 1974. "Tariffs and nontraded goods," Journal of International Economics, Elsevier, vol. 4(2), pages 177-185, May.
  6. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  7. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  8. Bergstrand, Jeffrey H, 1991. "Structural Determinants of Real Exchange Rates and National Price Levels: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 81(1), pages 325-34, March.
  9. Giles, David E A & Hampton, Peter, 1985. "An Engel Curve Analysis of Household Expenditure in New Zealand," The Economic Record, The Economic Society of Australia, vol. 61(172), pages 450-62, March.
  10. Lewbel, Arthur, 1989. "Exact Aggregation and a Representative Consumer," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 621-33, August.
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Cited by:
  1. Nébié, Gustave Adrien, 2008. "Syndrome Hollandais causé par l’aide : qu’en est-il pour les pays de l’UEMOA ?," Economics Papers from University Paris Dauphine 123456789/4066, Paris Dauphine University.
  2. ZARZOSA VALDIVIA, Fernando Enrique, 2006. "Income distribution, Dutch disease and real exchange rate movements," Working Papers 2006033, University of Antwerp, Faculty of Applied Economics.
  3. Monika Blaszkiewicz & Przemek Kowalski & Lukasz Rawdanowicz & Przemyslaw Wozniak, 2004. "Harrod-Balassa-Samuelson Effect in Selected Countries of Central and Eastern Europe," CASE Network Reports 0057, CASE-Center for Social and Economic Research.

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