A Micro-Empirical Foundation for the Political Economy of Exchange Rate Populism

Latin American countries have experienced cycles of expansionary policies, currency appreciation, and crises. The popularity of appreciations, through their effect on consumers' purchasing power, has been an accepted assumption in the literature despite a dearth of studies on the distributional impact of exchange rate movements. This study computes the welfare effects of exchange rate movements at different points of the income distribution for Brazil and Mexico. It shows that the distributional effects of appreciations split both countries on a regional basis, instead of across income levels. In Brazil, appreciations are found to benefit less or harm more the rural areas; in Mexico, they benefit less or harm more the Northern border states. IMF Staff Papers (2008) 55, 481–510. doi:10.1057/imfsp.2008.15; published online 1 July 2008