Quantifying the Effects of De Facto Exchange Rate Arrangements on Within-Country Inequality

In this thesis, we analyze the impact exchange rate arrangements bear on domestic inequality levels with the use of an unbalanced panel dataset for the period 1996-2013 across 92 countries. We find that as a currency peg strengthens domestic inequality declines. The finding is most robust and particularly striking when considering monetary unions alone, which induce a decline of approximately 4 percentage points in the Gini index of a country according to our estimations. Similarly, we notice marginal effects of foregoing monetary sovereignty dampen domestic inequality levels. Moreover, we observe the diminishing effects of trade flows on domestic inequality are enhanced under floating currencies and hindered for dollarized monetary systems and monetary unions. We believe such finding may be due to the unrestricted capital movements economies with floating monetary system benefit from, as opposed to economies with pegged currency systems. Lastly we find the Eurozone fiscal stability rules established under the Maastricht Treaty in 1992 to be highly inefficient with respect to inequality. Since inflation rates are reflective of government bonds issuances volume, from their inclusions in our estimations we notice income disparities diminish as the fiscal convergence criteria are not met by a Euro country, calling for a reinforcement of fiscal convergence within the union.