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Inequality and Exchange Rate Movements in an Open-Economy Macroeconomic Model

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  • Emilio Carnevali
  • Francesco Ruggeri
  • Marco Veronese Passarella

Abstract

This article presents a complete macroeconomic (SFC) model to study income and wealth distribution in an open economy. We argue that exchange rates and the stock of foreign debt play a major role in shaping inequality across and within countries. Using the ‘relative income hypothesis’, we show that debt-financed consumption of low-income households can affect both total income and the disposable income of high-income households in the medium run. In addition, while higher inequality is detrimental to the domestic economy, it can benefit trading partners.

Suggested Citation

  • Emilio Carnevali & Francesco Ruggeri & Marco Veronese Passarella, 2024. "Inequality and Exchange Rate Movements in an Open-Economy Macroeconomic Model," Review of Political Economy, Taylor & Francis Journals, vol. 36(2), pages 722-760, April.
    • Handle: RePEc:taf:revpoe:v:36:y:2024:i:2:p:722-760
    DOI: 10.1080/09538259.2022.2062961
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