Wealth Redistribution After Exchange Rate Devaluations By Andres Drenik, Gustavo Pereira and Diego J. Perez∗ A fraction of households in emerging of living (Cravino and Levchenko, 2017). economies save and borrow in foreign cur- Our findings suggest that the revaluation rency. By doing so they become exposed to of nominal net asset positions is an impor- revaluation effects on their wealth coming tant channel through which exchange rate from movements in the nominal exchange devaluations entail redistributive effects. rate. In this paper, we analyze the redis- tribution of liquid wealth across different I. Heterogeneity in Savings households after nominal exchange rate de- in Foreign Currency valuations. The key channel we focus on is the revaluation of nominal net asset posi- tions denominated in different currencies. Our analysis uses data from three dif- We begin our analysis by documenting ferent household surveys and covers the the fact that a significant fraction of house- following countries: Albania, Bosnia and holds in emerging economies have some as- Herzegovina, Bulgaria, Croatia, Czech Re- sets denominated in foreign currency, usu- public, Hungary, Macedonia, Peru, Poland, ally either in US Dollars or Euros. Our Romania, Serbia, Slovakia and Uruguay. analysis covers 13 countries from Eastern The first source of micro data is the Euro Europe and Latin America. We show that Survey carried out by the Austrian Central the likelihood of having assets in foreign Bank (OeNB) and covers all the mentioned currency is increasing in households' in- European countries. This survey contains come. This fact is generalized across all biannual data from 2007 to 2015. While countries in our sample. Then, we ana- having wide coverage in terms of countries lyze the redistributive effects of a nominal and time span, this survey has limited infor- exchange rate devaluation. We compute mation regarding households' holdings of fi- the magnitude of the revaluation of liquid nancial assets in foreign currency. The sec- wealth associated with a nominal devalua- ond source of data is a similar survey from tion of the local currency of 18% for dif- Peru conducted in 1997, for which a sim- ferent types of households. We find that ilar caveat applies. The last source is the there is an important degree of redistribu- household financial survey from Uruguay tion from households with low income to conducted in 2013 that contains detailed those with high income. information on households' assets and lia- The existing literature has analyzed the bilities broken down by the currency of de- redistributive impact of nominal exchange nomination. The structure of this survey rate devaluations through its effects on the is similar to the structure of the Survey of labor market (Drenik, 2016) and the cost Consumer Finances conducted in the US. We first document the degree of hetero- ∗ Drenik: Department of Economics, Columbia geneity in the exposure of households to for- University, 420 W. 118th Street, New York, NY, eign currency. For this, we group house- 10027 (email: [email protected]); Pereira: De- holds into three terciles according to their partment of Economics, Columbia University, 420 level of income and compute the share of W. 118th Street, New York, NY, 10027 (email: [email protected]); Perez: Department of Eco- households that have some liquid asset de- nomics, New York University, 19 W. 4th Street, 6FL, nominated in foreign currency. For Peru New York, NY 10012 (email: [email protected]). We and Uruguay we consider cash holdings, thank Alberto Cavallo for useful comments and the Aus- time and savings bank deposits as all pos- trian Central Bank and the Economics Department at Universidad de la Rep´ublica(Uruguay) for sharing their sible liquid assets. For the European coun- data. tries we consider cash holdings only due 1 2 PAPERS AND PROCEEDINGS MONTH YEAR to data limitations.1 Figure 1a shows the In Figure 1b, we show the fraction of share of households that have a positive households' liquid wealth that is denomi- fraction of their wealth denominated in for- nated in foreign currency and also find that eign currency. The average share of house- it is increasing in households' income in all holds exposed to foreign currency differs countries. This fact is mostly driven by significantly across countries, ranging be- the participation/non-participation margin tween 5% and 65%. Despite this hetero- documented above. geneity, within each country the likelihood Finally, we also document that these dif- of being exposed to foreign currency in- ferences in exposure to foreign currency creases with households' income. The share persist over time. In the Online Appendix of households in the top income tercile ex- we show that in almost every point in time posed to foreign currency is higher than the the likelihood that households are exposed share for those in the bottom income ter- to foreign currency is increasing in income. cile in every country. These findings sug- This is due to the fact that although the gest that the market for foreign currency is share of households that are exposed to for- segmented, with more limited participation eign currency varies over time for each in- by low-income households. come tercile, it tends to co-move strongly across the income distribution. This persis- tence suggests that the redistributive effects 80 of devaluations should be present in most SRB devaluation episodes, regardless of when ALB 60 they occur. .MKD SVK CZE HRV II. Redistributive Effects of an 40 POL Exchange Rate Devaluation .URU ROU 20 BGR Share of HHs with Assets in FC Shareof HHswith HUN. BIH We investigate the redistributive effects PER of an exchange rate devaluation by ana- 0 lyzing how the value of liquid wealth de- Low Income Middle Income High Income nominated in local and foreign currency is (a) Share of Households with Assets in FC affected on-impact by an unexpected and permanent devaluation. The goal of this SRB exercise is to determine how unequal is the 50 distribution of gains and losses experienced by households. We focus on Uruguay since 40 it is the country with the most granular 30 MKD . HRV data. We also measure effects on liquid wealth since changes in liquid wealth are 20 ALB more likely to translate into changes in con- Share of Liquid Wealth inFC Shareof Liquid Wealth SVK sumption in the short-run. This exercise is 10 . BIH BGR CZE. ROU POL similar to the one carried out by Doepke HUN and Schneider(2006) that focus on the re- 0 Low Income Middle Income High Income distributive effects of inflation in the US. Investments in local and foreign currency (b) Share of Liquid Wealth in FC in emerging economies can have different payoffs given the fluctuations of nominal Figure 1. Heterogeneity in Savings exchange rate. Figure2 shows the dis- in Foreign Currency tribution of the monthly devaluation rates that Uruguay experienced between 1995 and 2016. Large monthly devaluations 1In our Online Appendix we repeat the analysis for the European countries with bank deposits and reach (above 10%) are occasionally observed. Ad- similar conclusions. ditionally, there are also periods of con- VOL. VOL NO. ISSUE WEALTH REDISTRIBUTION AFTER EXCHANGE RATE DEVALUATIONS 3 tinued large devaluations, such as the one per US dollar) and NWFC (NWLC ) is the experienced between June and September net liquid wealth denominated in foreign 2002 when the nominal exchange rate in- (local) currency. creased by 89%. Finally, the distribution is Table1 presents summary statistics positively skewed, so large devaluations are about the composition of households' nom- more common than large appreciations. inal portfolios.3 Statistics are presented for the overall population and by income ter- cile. First, notice that only a small frac- 25 tion of households have any type of nominal asset or liability. Only 11% of households 20 have assets in foreign currency, 9% have as- sets in local currency and a third of house- 15 holds have any kind of liability. However, Density the share of households with some assets 10 is increasing in household income. While 5 only 3% (5%) of households with low in- come have assets in foreign (local) currency, 0 -.1 0 .1 .2 .3 26% (19%) of households with high income Monthly devaluation rate have assets in foreign (local) currency. The share of households with any kind of liabil- Figure 2. Distribution of Devalua- ity is fairly stable across the income distri- tion Rates: Uruguay 1995-2016 bution. In terms of the intensive margin, on av- The first step in our analysis requires erage households have US$16,406 in foreign computing nominal net liquid asset posi- currency assets, US$7,324 in local currency tions by currency of denomination for each assets and US$3,081 in local currency lia- household in the survey. On the asset bilities (all conditional on having a positive side of the balance sheet we include: sav- amount). The average net liquid wealth is ings and checking accounts and cash.2 On around US$1,000. However, the distribu- the liability side we include: credit card tion of net liquid wealth is highly unequal: debt and non-mortgage/non-vehicle related the bottom decile is US$-2,864, the median debt. All these assets and liabilities are cat- is US$0 and the top decile is US$1,440. egorized as being denominated in foreign Mean holdings and net wealth are also in- (FC) and local currency (LC). Foreign creasing in income. While the average net currency assets/liabilities are almost com- liquid wealth is US$-637 among the low in- pletely denominated in US dollars. Thus, come households, it is equal to US$4,970 we define total net liquid wealth (TNW ) among high income households.