Income Inequality and the Real Exchange Rate
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.
|Date of creation:||01 Aug 2000|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bhagwati, Jagdish N, 1984. "Why Are Services Cheaper in the Poor Countries?," Economic Journal, Royal Economic Society, vol. 94(374), pages 279-86, June.
- Maurice Obstfeld., 1993. "Model Trending Real Exchange Rates," Center for International and Development Economics Research (CIDER) Working Papers C93-011, University of California at Berkeley.
- Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
- 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.
- Bourguignon, F. & Morrisson, C., 1989. "Income Distribution, Development and Foreign Trade: A Cross-Sectional Analysis," DELTA Working Papers 89-05, DELTA (Ecole normale supérieure).
- Roland Bénabou, 1996.
"Inequality and Growth,"
in: NBER Macroeconomics Annual 1996, Volume 11, pages 11-92
National Bureau of Economic Research, Inc.
- Roland Benabou, 1996. "Inequality and Growth," NBER Working Papers 5658, National Bureau of Economic Research, Inc.
- Benabou, R., 1996. "Inequality and Growth," Working Papers 96-22, C.V. Starr Center for Applied Economics, New York University.
- Bénabou, Roland, 1996. "Inequality and Growth," CEPR Discussion Papers 1450, C.E.P.R. Discussion Papers.
- Takatoshi Ito & Peter Isard & Steven Symansky, 1997.
"Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia,"
NBER Working Papers
5979, National Bureau of Economic Research, Inc.
- Takatoshi Ito & Peter Isard & Steven Symansky, 1999. "Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia," NBER Chapters, in: Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues (NBER-EASE volume 7), pages 109-132 National Bureau of Economic Research, Inc.
- Kenneth A. Froot & Kenneth Rogoff, 1994.
"Perspectives on PPP and Long-Run Real Exchange Rates,"
NBER Working Papers
4952, National Bureau of Economic Research, Inc.
- Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
- Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
- Deininger, Klaus & Squire, Lyn, 1996.
"A New Data Set Measuring Income Inequality,"
World Bank Economic Review,
World Bank Group, vol. 10(3), pages 565-91, September.
- Klaus Deininger & Lyn Squire, 1996. "A New Data Set Measuring Income Inequality," CEMA Working Papers 512, China Economics and Management Academy, Central University of Finance and Economics.
- Hongyi Li & Lyn Squire & Tao Zhang & Heng-fu Zou, 1999. "A Data Set on Income Distribution," CEMA Working Papers 575, China Economics and Management Academy, Central University of Finance and Economics.
- Menzie Chinn & Louis Johnston, 1996.
"Real Exchange Rate Levels, Productivity and Demand Shocks: Evidence from a Panel of 14 Countries,"
NBER Working Papers
5709, National Bureau of Economic Research, Inc.
- Louis Dorrance Johnston & Menzie David Chinn, 1997. "Real Exchange Rate Levels, Productivity and Demand Shocks; Evidence From a Panel of 14 Countries," IMF Working Papers 97/66, International Monetary Fund.
- Jose De Gregorio & Holger C. Wolf, 1994.
"Terms of Trade, Productivity, and the Real Exchange Rate,"
NBER Working Papers
4807, National Bureau of Economic Research, Inc.
- Jose De Gregorio & Holger C. Wolf, 1994. "Terms of Trade, Productivity, and the Real Exchange Rate," Working Papers 94-19, New York University, Leonard N. Stern School of Business, Department of Economics.
- 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.
- 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.
- Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
- Irving B. Kravis & Robert E. Lipsey, 1982. "Towards an Explanation of National Price Levels," NBER Working Papers 1034, National Bureau of Economic Research, Inc.
- repec:cup:cbooks:9780521296762 is not listed on IDEAS
- Lewbel, Arthur, 1989. "Exact Aggregation and a Representative Consumer," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 621-33, August.
- Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
- José De Gregorio & Jong-Wha Lee, 1999. "Education and Income Distribution: New Evidence from Cross-country Data," Documentos de Trabajo 55, Centro de Economía Aplicada, Universidad de Chile.
- 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.
- 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.
- Dornbusch, Rudiger, 1974. "Tariffs and nontraded goods," Journal of International Economics, Elsevier, vol. 4(2), pages 177-185, May.
When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:0849. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.