Income Inequality and the Real Exchange Rate
نویسندگان
چکیده
This paper explores the effect of income inequality on 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. A variety of effects are possible depending on the sectoral expenditure elasticities and relative factor intensities. Consistent with this, a strong relationship in levels exists in the data between inequality and the bilateral real exchange rate. This partial correlation is positive in the case of within estimation and negative in the case of between estimation. This finding is related to the expected short and long run effects of inequality on the real exchange rate, and its relationship with the literature on the effect of inequality on growth is discussed. JEL Codes: F43, D31.
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