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The Distributional Consequences of Exchange Rate Devaluations

Listed author(s):
  • Andrei Levchenko

    (University of Michigan)

  • Javier Cravino

    (University of Michigan)

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 tradeables. Within tradeable product categories, the poor consume lower-priced varieties that contain relatively less domestic value added. A devaluation raises the relative price of tradeables, and within product categories raises the relative price of cheaper varieties. Both effects imply that the devaluation hurts the low-income households more than the high-income ones. We quantify these effects following the 1994 Mexican peso devaluation and show that the distributional consequences can be large. Following the devaluation, the cost of the consumption basket of those in the bottom decile of the income distribution rose between 1/3 and 1/2 times more than the cost of the consumption basket for the top income decile. We supplement the detailed results for Mexico using cross-country evidence.

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File URL: https://economicdynamics.org/meetpapers/2015/paper_1060.pdf
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Paper provided by Society for Economic Dynamics in its series 2015 Meeting Papers with number 1060.

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Date of creation: 2015
Handle: RePEc:red:sed015:1060
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2004. "Large Devaluations and the Real Exchange Rate," CEPR Discussion Papers 4810, C.E.P.R. Discussion Papers.
  2. Berger, David & Faust, Jon & Rogers, John H. & Steverson, Kai, 2012. "Border prices and retail prices," Journal of International Economics, Elsevier, vol. 88(1), pages 62-73.
  3. Jed Friedman & James Levinsohn, 2001. "The Distributional Impacts of Indonesia's Financial Crisis on Household Welfare: A 'Rapid Response' Methodology," Working Papers 482, Research Seminar in International Economics, University of Michigan.
  4. Jerry Hausman, 2003. "Sources of Bias and Solutions to Bias in the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 23-44, Winter.
  5. Guido G. Porto, 2003. "Using survey data to assess the distributional effects of trade policy," Policy Research Working Paper Series 3137, The World Bank.
  6. Etienne Gagnon, 2007. "Price setting during low and high inflation: evidence from Mexico," International Finance Discussion Papers 896, Board of Governors of the Federal Reserve System (U.S.).
  7. Christian Ahlin & Mototsugu Shintani, 2006. "Menu Costs and Markov Inflation: A Theoretical Revision with New Evidence," Vanderbilt University Department of Economics Working Papers 0610, Vanderbilt University Department of Economics.
  8. Linda S. Goldberg & José Manuel Campa, 2010. "The Sensitivity of the CPI to Exchange Rates: Distribution Margins, Imported Inputs, and Trade Exposure," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 392-407, May.
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