Income Inequality Do Exchange Rate Regimes Matter?

In a recent report by the United Nations Development Programme it was argued that the two corner solutions dictated under the Washington Consensus have had adverse impacts on inequality, for they put developing economies at the risk of currency crises and large currency devaluations. The present paper thus intends to extend the discussion on optimal exchange rate regimes to the issue of income inequality by means of a literature analysis. The basic underlying question is whether there is a relationship between a country’s exchange rate regime and the distribution of income within that country, and whether one type of exchange rate regime exhibits a superior performance pertaining to income inequality. The review of the existing literature reveals that different studies come to opposite conclusions about the possible effect of the variables (inflation, output volatility, trade) through which the exchange rate regime could affect income inequality. For a more meaningful picture regarding the link between ERR and income inequality future research would have to resort to empirical methods, given that the findings from the literature review apparently come to nothing.