Exchange Rates, Stabilisation Policy and Redistribution of Income

Abstract

This paper shows that exchange rate alignments are also used for redistribution of income among different groups. The heterogeneous impacts of stabilisation policies lead to formation of various coalitions throughout the evolution of stabilisation programmes. These coalitions can produce unsustainable economic policies at the expense of other groups. The model categorises these various groups with respect to their shares in total production of tradables and non-tradables. An increase in the relative prices of non-tradables benefits the poor more than the rich and middle classes. In addition to the poor, the rich benefit from unsustainable macroeconomic polices by lending to the government and eventually escaping the cost of stabilisation in the long run.