The Distributional Consequences of Large Devaluations
We study the impact of large exchange rate devaluations on the cost of living at different points on the income distribution. Poor households spend relatively more on tradeable product categories, and consume lower-priced varieties within categories. Changes in the relative price of tradeables and of lower-priced varieties affect the cost of living of low-income relative to high-income households. We quantify these effects following the 1994 Mexican devaluation and show that they can have large distributional consequences. Two years post-devaluation, the cost of living for the bottom income decile rose 1.48 to 1.62 times more than for the top income decile.
We are grateful to Mark Aguiar, David Atkin, Ariel Burstein, Yu Chin Chen, Michael Devereux, Natalia Ramondo, Daniele Siena, and seminar and workshop participants at several institutions for helpful suggestions, and to Laurien Gilbert and Nitya Pandalai-Nayar for excellent research assistance. We would especially like to thank Christian Ahlin and Mototsugu Shintani for sharing the digitized pre-April 1995 Mexican consumer price data. Financial support from Michigan Institute for Teaching and Research in Economics (MITRE) and from the National Science Foundation under grant SES-1628879 is gratefully acknowledged. Levchenko would also like to thank the University of Zurich, the UBS Center for Economics in Society, and the Excellence Foundation Zurich for their hospitality during the 2014-15 academic year and financial support for this project. Email: email@example.com, firstname.lastname@example.org. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Javier Cravino & Andrei A. Levchenko, 2017. "The Distributional Consequences of Large Devaluations," American Economic Review, vol 107(11), pages 3477-3509. citation courtesy of