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Inequality, the price of nontradables, and the real exchange rate : theory and cross-country evidence


  • Hong-Ghi Min


The author provides theoretical and empirical evidence of a negative association between income inequality and real exchange rates. First, he builds a theoretical model showing the transmission mechanism from inequality to real exchange rates. Second, using cross-country data, he demonstrates that the theoretical argument has empirical support. The association is large, significant, and robust to alternative specifications of the reduced form model and estimation methodologies. These findings provide empirical support for Poverty Reduction Strategy Papers, government strategies agreed on with the World Bank that hinge on four major objectives:accelerating equity-based growth, guaranteeing access to basic social services for the poor, expanding opportunities for employment and income-generating activities for the poor, and promoting good governance. The author's analysis indicates that"equity-based growth"and"export-driven growth"are compatible policy goals. But the negative relationship between inequality and real exchange rates does not imply that policies aimed at dramatic redistribution will automatically lead to real depreciation of the domestic currency, improve the external balance, and accelerate economic growth.

Suggested Citation

  • Hong-Ghi Min, 2002. "Inequality, the price of nontradables, and the real exchange rate : theory and cross-country evidence," Policy Research Working Paper Series 2758, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2758

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    References listed on IDEAS

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    19. Adams, Richard H. Jr., 2000. "The politics of economic policy reform in developing countries," Policy Research Working Paper Series 2443, The World Bank.
    20. Vito Tanzi, 1998. "Fundamental Determinants of Inequality and the Role of Government," IMF Working Papers 98/178, International Monetary Fund.
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