DP12035 The Distributional Consequences of Large Devaluations

Author(s): Javier Cravino, Andrei A. Levchenko
Publication Date: May 2017
Keyword(s): consumption baskets, Distributional Effects, Exchange Rates, large devaluations
JEL(s): F31, F61
Programme Areas: International Trade and Regional Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12035

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.