The Distributional Consequences of Large Devaluations

University of Zurich, UBS International Center of Economics in Society, Working Paper No. 15

51 Pages Posted: 1 Jun 2016

See all articles by Javier Cravino

Javier Cravino

University of California, Los Angeles

Andrei A. Levchenko

University of Michigan - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: February 2016

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.

Keywords: Exchange rates, large devaluations, distributional effects, consumption baskets

JEL Classification: F31, F61

Suggested Citation

Cravino, Javier and Levchenko, Andrei A., The Distributional Consequences of Large Devaluations (February 2016). University of Zurich, UBS International Center of Economics in Society, Working Paper No. 15, Available at SSRN: https://ssrn.com/abstract=2786971 or http://dx.doi.org/10.2139/ssrn.2786971

Javier Cravino (Contact Author)

University of California, Los Angeles

Box 951477
Los Angeles, CA 90095-1477
United States

Andrei A. Levchenko

University of Michigan - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

HOME PAGE: http://alevchenko.com

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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