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Is there evidence that the exchange rate depreciation shocks lead to the redistribution of income from workers to producers’ profits? In addition, to what extent do consumer price inflation and exchange rate volatility channels transmit exchange rate depreciation shocks to marginal propensity to consume? Evidence shows that the NEER depreciation shock has contractionary effects on economic growth. This is more so due to the income redistribution effects from workers to producers. The effects are propagated via the inflation channel. The presence of inflation following the NEER depreciation shocks exacerbates the decline in wages. This is in contrast to the magnifying effect of the NEER depreciation shock that raises gross operating surpluses. This suggests that the NEER depreciation redistributes the incomes from workers to producers, and the effects are magnified by inflation levels. Furthermore, price stability matters and a low inflation is ideal. The time varying marginal propensity to consume declines but the contraction is larger due to persistently rising exchange rate depreciation shock than a less persistent shock. In addition, the persistently rising exchange rate depreciation shock leads to a large increase in the Gini coefficient than a less persistent shock. This evidence shows the redistribution of income effects has implications for the time varying marginal propensity to consume and Gini coefficient. Moreover, the time varying marginal propensity to consume declines more in the presence of overall and permanent exchange rate volatility channels than when these are shutoff in the model. This evidence corroborates the findings that the time varying marginal propensity to consume is impacted by the elevated inflationary pressures and the accompanying exchange rate volatility following a NEER depreciation shock. These results show that price and exchange stability matters.
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- Exchange Rate Depreciation Shocks and Redistribution of Income: The Marginal Propensity to Consume Channel
- Chapter 10
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