Inequality, the Price of Nontradables, and the Real Exchange Rate : Theory and Cross-Country Evidence

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. Seco...

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Bibliographic Details
Main Author:	Min, Hong-Ghi
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2013
Subjects:	BUDGET CONSTRAINT CAPITAL INFLOWS CD CENTRAL BANK COUNTRY DUMMY CROSS- COUNTRY EVIDENCE CROSS-COUNTRY DATA CROSS-COUNTRY DIFFERENCES CROSS-COUNTRY EVIDENCE CROSS-COUNTRY STUDY CURRENT ACCOUNT DATA SET DEPENDENT VARIABLE DEPOSIT DOLLARIZATION DEVELOPING COUNTRIES DEVELOPING COUNTRY DISTRIBUTIONAL IMPLICATIONS DOMESTIC INFLATION DOMESTIC PRICE ECONOMIC GROWTH ECONOMIC LITERATURE ECONOMIC REVIEW ECONOMICS ELASTICITY EMERGING ECONOMIES EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EMPIRICAL FINDINGS EMPIRICAL MODEL EMPIRICAL RESULTS EMPIRICAL STUDIES EMPIRICAL STUDY EMPIRICAL SUPPORT ESTIMATION RESULTS EXCHANGE RATE DEPRECIATION EXCHANGE RATE DEVALUATION EXCHANGE RATES EXPLANATORY VARIABLES EXTERNAL BORROWING EXTERNAL SHOCKS FOREIGN CURRENCY GDP GDP DEFLATOR GINI COEFFICIENT GOVERNMENT BUDGET GROWTH MOMENTUM GROWTH TARGET HISTORICAL PERSPECTIVE INCOME INCOME DISTRIBUTION INCOME ELASTICITY INCOME ELASTICITY OF DEMAND INCOME GROUP INCOME GROUPS INCOME INEQUALITY INCOME LEVEL INCOME SHARE INDEPENDENT VARIABLES INEQUALITY INEQUALITY INDEPENDENT INEQUALITY MEASURE INTERNATIONAL COMPARISONS INTERNATIONAL COMPETITIVENESS INTERNATIONAL MONETARY FUND LABOR MARKETS LIQUID LIABILITIES LIQUIDITY LONG-TERM GROWTH LOW INCOME MACROECONOMIC ADJUSTMENT MACROECONOMIC MANAGEMENT MACROECONOMIC POLICY MEASURING INCOME INEQUALITY MEMBER COUNTRIES NEGATIVE CORRELATION NEGATIVE RELATIONSHIP NEGATIVE SIGN NOMINAL EXCHANGE RATE OPEN ECONOMIES POLICY IMPLICATIONS POLICY MAKERS POLICY REFORM POLICY RESEARCH POLITICAL ECONOMY POLITICAL INSTABILITY POVERTY REDUCTION POVERTY REDUCTION STRATEGY POWER PARITY PRICE LEVELS PRODUCTIVITY PRODUCTIVITY GROWTH PUBLIC DEBT PUBLIC INVESTMENT PUBLIC SECTOR PURCHASING POWER REAL DISTURBANCES REAL EXCHANGE REAL EXCHANGE RATE REAL EXCHANGE RATES REAL INTEREST REAL INTEREST RATES REDISTRIBUTIVE POLICIES REDISTRIBUTIVE POLICY REDUCING INEQUALITY REDUCTION STRATEGY REGRESSION RESULTS RELATIVE PRICE RELATIVE PRICES SAFETY NET SIGNIFICANCE LEVEL STRUCTURAL REFORMS TRADE OPENNESS TRANSMISSION MECHANISM UNEMPLOYMENT WEALTH
Online Access:	http://documents.worldbank.org/curated/en/2002/01/1687151/inequality-price-nontradables-real-exchange-rate-theory-cross-country-evidence http://hdl.handle.net/10986/15719

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Summary:	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.

Inequality, the Price of Nontradables, and the Real Exchange Rate : Theory and Cross-Country Evidence

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