Source: Economic Research Forum
Author(s): Ibrahim Elbadawi, Eman Refaat
This paper develops a theoretical model that allows for assessing the poverty impact of the real exchange rate (RER), as an economy-wide relative price, in a fully optimizing model at the household and the firm levels. The model motivates empirical estimation of the response of average household wage and non-wage incomes to RER depreciation/undervaluation. In particular, it is possible to assess the extent to which an RER undervaluation (or RER depreciation) is pro-poor, using a precise metric that compares the rate of change of the income of the poor relative to that of the non-poor in response to RER devaluation/depreciation. We estimate the model using national-level panel data from the Egyptian Central Agency for Public Mobilization and Statistics and the ERF’s data bank. We find robust evidence suggesting that strategic real currency depreciation/undervaluation at the macroeconomic level promotes pro-poor income growth at the household level…
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