Nonlinear Effects of Exchange Rate and Interest Rate on Wealth Inequality in Selected Developing Countries
Keywords:
Institutional quality, Financial development , Wealth inequality , Exchange rate , Real interest rateAbstract
This study is applied in purpose and descriptive-analytical in nature and falls into the category of ex-post facto research. The article investigates the nonlinear effects of the exchange rate and interest rate on wealth inequality in selected developing countries. Statistical data were collected from the World Bank’s World Development Indicators (WDI). The statistical population under investigation includes annual data of selected developing countries for the period 2000 to 2023, gathered from reputable international websites. The studied population specifically consists of the developing member states of the D8 organization: Iran, Turkey, Pakistan, Bangladesh, Indonesia, Malaysia, Egypt, and Nigeria. Using a Panel Smooth Transition Regression (PSTR) model, with the exchange rate as the transition variable, the wealth inequality function in the selected developing countries is modeled. After confirming the presence of nonlinearity, the results of the nonlinear part of the model are analyzed. According to the model estimation results, the coefficient of the real interest rate variable (INTR) equals 0.11, indicating a direct effect of the real interest rate on wealth inequality in the selected countries. Given that the associated p-value is 0.0491, which is less than 0.05, this effect is statistically significant at the 95% confidence level. Similarly, the coefficient and p-value for the nominal exchange rate variable (EX) are 0.016 and 0.0355, respectively, suggesting that the nominal exchange rate has a positive and significant impact on wealth inequality in the selected developing countries. Regarding financial development, the estimated coefficient is −0.08 with a p-value of 0.0015, indicating a significant negative effect of financial development on wealth inequality in the selected countries. For the trade openness variable (OPEN), the coefficient in the nonlinear model is 0.022717, and its p-value is 0.0274, showing a positive and significant effect of trade openness on wealth inequality in the selected developing countries. In the nonlinear estimation, the coefficient for institutional quality (RQ) is −0.053752, with a p-value of 0.0165, demonstrating a significant negative impact of institutional quality on wealth inequality in the selected countries.
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Copyright (c) 2025 Mohsen Khanaki (Author); Mahmood Mahmoodzadeh (Corresponding author); Mehdi Fathabadi, Masoud Soufimajidpour (Author)
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