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The Distributional Consequences of Large Devaluations

Listed author(s):
  • Javier Cravino

    (University of Michigan and NBER)

  • Andrei A. Levchenko

    (University of Michigan, NBER, and CEPR)

We study the differential impact of large exchange rate devaluations on the cost of living at different points on the income distribution. Across product categories, the poor have relatively high expenditure shares in tradeable products. Within tradeable product categories, the poor consume lower-priced varieties. Changes in the relative price of tradeables and the relative prices of lower-priced varieties following a devaluation will affect the cost of the consumption basket of the low-income households relative that of the high-income households. We quantify these effects following the 1994 Mexican peso devaluation and show that their distributional consequences can be large. In the two years that follow the devaluation, the cost of the consumption basket of those in the bottom decile of the income distribution rose between 1.46 and 1.6 times more than the cost of the consumption basket for the top income decile.

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File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers626-650/r648.pdf
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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 648.

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Length: 59 pages
Date of creation: Nov 2015
Handle: RePEc:mie:wpaper:648
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Web page: http://fordschool.umich.edu/rsie/
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