Macro Seminar

Javier Cravino

University of Michigan


Seminar 3 – 12:00


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 that are bundled with less local distribution services. A devaluation raises the relative price of tradeables, increasing the price of the basket of goods consumed by poor households relative to the one consumed by rich households. We quantify these effects following the 1994 Mexican peso devaluation and show that their distributional consequences can be large. Following the devaluation, the cost of the consumption basket of those in the bottom decile of the income distribution rose between 1.4 and 1.63 times more than the cost of the consumption basket for the top income decile. We supplement the detailed results for Mexico using cross-country evidence.

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