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Income Inequality and the Real Exchange Rate: Linkages and Evidence

Author

Listed:
  • Hong-Ghi Min

    (Department of Management Science, Korea Advanced Institute of Science and Technology)

  • Sang-Ook Shin

    (Department of Finance, Texas A&M University)

  • Judith A. McDonald

    (Department of Economics, Lehigh University)

Abstract

A simple model with non-homothetic preferences and purchasing-power par- ity for tradables shows that improved income inequality decreases the price of nontradables, resulting in a real depreciation. This hypothesized negative as- sociation between income inequality and the real exchange rate has robust empirical support from random- and fixed-effects models, dynamic panel es- timations, and panel vector autoregressions. Thus, policies that improve a country’s income distribution, by leading to a depreciation of the real ex- change rate, may improve the competitiveness of its goods. However, this income inequality-real exchange rate relationship does not imply that dra- matic redistributive policies will automatically bring about a real depreciation of the domestic currency.

Suggested Citation

  • 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.
    • Handle: RePEc:cuf:journl:y:2015:v:16:i:1:min
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    References listed on IDEAS

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    More about this item

    Keywords

    Income distribution; Gini coefficient; Price of nontradables; Real exchange rate; Real depreciation;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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