Shifting sands: How exchange rate volatility shapes income distribution in high-income countries

Abstract

This study examines the effect of exchange rate volatility (ERV), depreciating ER movements, and appreciating ER movements on income inequality in 31 high-income countries from 1990 to 2021. Using panel data econometric models and data from multiple sources, the findings indicate that ERV increases Gini coefficients, disproportionately benefits the top 10/20 %, and negatively impacts the bottom 40/50 %. The study also finds ER depreciation exacerbates income inequality, while appreciations have uncertain effects. The effects of ERV are stronger on the market Gini coefficient than the net Gini coefficient, highlighting the important role of redistribution policies. The study underscores the critical role of ER and their volatility in influencing income distribution. It also highlights the importance of ER management policies and income redistribution mechanisms.