The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data

Author/Editor:

Davide Furceri ; Prakash Loungani ; Jonathan David Ostry

Publication Date:

April 6, 2018

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

We take a fresh look at the aggregate and distributional effects of policies to liberalize international capital flows—financial globalization. Both country- and industry-level results suggest that such policies have led on average to limited output gains while contributing to significant increases in inequality—that is, they pose an equity–efficiency trade-off. Behind this average lies considerable heterogeneity in effects depending on country characteristics. Liberalization increases output in countries with high financial depth and those that avoid financial crises, while distributional effects are more pronounced in countries with low financial depth and inclusion and where liberalization is followed by a crisis. Difference-indifference estimates using sectoral data suggest that liberalization episodes reduce the share of labor income, particularly for industries with higher external financial dependence, those with a higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and those with a higher elasticity of substitution between capital and labor. The sectoral results underpin a causal interpretation of the findings using macro data.

Series:

Working Paper No. 18/83

Subject:

English

Publication Date:

April 6, 2018

ISBN/ISSN:

9781484350898/1018-5941

Stock No:

WPIEA2018083

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

61

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