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The distributional consequences of large devaluations


Cravino, Javier; Levchenko, Andrei A (2016). The distributional consequences of large devaluations. UBS Center Working Paper Series 15, University of Zurich.

Abstract

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 tradeable products. Within tradeable product categories, the poor consume lower-priced varieties. Changes in the relative price of tradeables and the relative prices of lower-priced varieties following a devaluation will affect the cost of the consumption basket of the low-income households relative that of the high-income households. We quantify these effects following the 1994 Mexican peso devaluation and show that their distributional consequences can be large. In the two years that follow the devaluation, the cost of the consumption basket of those in the bottom decile of the income distribution rose between 1.46 and 1.6 times more than the cost of the consumption basket for the top income decile.

Abstract

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 tradeable products. Within tradeable product categories, the poor consume lower-priced varieties. Changes in the relative price of tradeables and the relative prices of lower-priced varieties following a devaluation will affect the cost of the consumption basket of the low-income households relative that of the high-income households. We quantify these effects following the 1994 Mexican peso devaluation and show that their distributional consequences can be large. In the two years that follow the devaluation, the cost of the consumption basket of those in the bottom decile of the income distribution rose between 1.46 and 1.6 times more than the cost of the consumption basket for the top income decile.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
03 Faculty of Economics > UBS International Center of Economics in Society
Working Paper Series > UBS Center Working Paper Series
Dewey Decimal Classification:330 Economics
JEL Classification:F31, F61
Uncontrolled Keywords:Exchange rates, large devaluations, distributional effects, consumption baskets
Language:English
Date:February 2016
Deposited On:31 May 2016 13:08
Last Modified:31 May 2016 13:08
Series Name:UBS Center Working Paper Series
Number of Pages:47
ISSN:2296-2778
Official URL:http://www.ubscenter.uzh.ch/assets/workingpapers/WP15_The_Distributional_Consequences_of_Large_Devaluations.pdf
Related URLs:http://www.ubscenter.uzh.ch/index.php/de/publications/workingpapers

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