Working Paper: NBER ID: w23409
Authors: Javier Cravino; Andrei A. Levchenko
Abstract: 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.
Keywords: exchange rate devaluation; cost of living; income distribution; inflation
JEL Codes: F31; F61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 1994 Mexican devaluation (F31) | cost of living for low-income households (D19) |
| cost of living for low-income households (D19) | inflation rates post-devaluation (F31) |
| 1994 Mexican devaluation (F31) | increased retail prices of tradables (F19) |
| increased retail prices of tradables (F19) | cost of living for low-income households (D19) |
| relative spending patterns of different income groups (D31) | cost of living for low-income households (D19) |
| observed price changes (E30) | cost of living for low-income households (D19) |