Competitive real exchange rates are good for the poor : evidence from Egyptian household surveys

Abstract EN

This paper develops a theoretical model that allows for assessing the poverty impact of the real exchange rate (RER), as an economy-wide relative price, in a fully optimizing model at the household and the firm levels.

The model motivates empirical estimation of the response of average household wage and non-wage incomes to RER depreciation / undervaluation.

In particular, it s possible to assess the extent to which an RER undervaluation (or RER depreciation) is pro-poor, using a precise metric that compares the rate of change of the income of the poor relative to that of the non-poor in response to RER devaluation/depreciation.

We estimate the model using national-level panel data from the Egyptian Central Agency for Public Mobilization and Statistics and the ERF’s data bank.

We find robust evidence suggesting that strategic real currency depreciation/undervaluation at the macroeconomic level promotes pro-poor incomegrowth at the household level.