On the value of the dollar and income inequality: Asymmetric evidence from state level data in the U.S.

On the assumption that wages do not adjust fully to inflationary effects of currency depreciation, a depreciation could shift income from workers to producers which could worsen income inequality. When we tested this hypothesis using a standard linear ARDL model, we found no long-run support for the hypothesis in any of the 51 states of the U.S. However, when we applied recent advances in formulating nonlinearity and introduced nonlinear adjustment of the real effective exchange rate of the dollar, we found significant short-run and long-run asymmetric effects in almost half of the 51 states. In most states, dollar depreciation was found to have un-equalizing effects on income inequality, consistent with theory.