The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data
IMF Working Papers, April 6, 2018
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Bibliographic details
- Authors: Davide Furceri, Prakash Loungani, Jonathan David Ostry
- Published: April 6, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484350898.001
Main findings
- Financial globalization (policies to liberalize international capital flows) has on average produced limited output gains while contributing to significant increases in inequality—an equity–efficiency trade-off.
- Considerable heterogeneity in effects across countries:
- Liberalization increases output in countries with high financial depth.
- Liberalization increases output in countries that avoid financial crises.
- Distributional effects (increased inequality) are more pronounced in countries with low financial depth and low inclusion.
- Distributional effects are more pronounced where liberalization is followed by a crisis.
- Sectoral (difference-in-difference) evidence:
- Liberalization episodes reduce the share of labor income.
- Labor-share declines are particularly marked for industries with:
- higher external financial dependence;
- a higher natural propensity to use layoffs to adjust to idiosyncratic shocks;
- a higher elasticity of substitution between capital and labor.
- Sectoral results support a causal interpretation of the macro-level findings.
Empirical approach and scope
- Uses both country-level and industry-level (sectoral) data to assess aggregate and distributional impacts of capital account liberalization.
- Applies difference-in-difference estimates at the sectoral level to identify effects on labor share and linkages to industry characteristics.
Policy-relevant implications
- Capital account liberalization presents trade-offs between aggregate output and distributional outcomes; policies should account for equity–efficiency considerations.
- Country characteristics matter for outcomes of liberalization:
- Strengthening financial depth and resilience to crises can improve the likelihood of positive output effects.
- Strengthening financial inclusion may mitigate adverse distributional effects.
- Industry structure and labor market institutions influence how liberalization affects labor income shares; policies that address firms’ adjustment mechanisms (for example, job protection, retraining, social insurance) may shape distributional outcomes.
Publication and metadata
- Authors: Davide Furceri, Prakash Loungani, Jonathan David Ostry
- Date: April 6, 2018
- Pages: 61
- Volume: 2018
- Issue: 083
- Series: Working Paper No. 2018/083
- DOI: https://doi.org/10.5089/9781484350898.001
- Stock No: WPIEA2018083
- ISBN: 9781484350898
- ISSN: 1018-5941
- Subjects: Balance of payments, Capital account, Capital account liberalization, Capital flows, Income inequality, Labor, Labor share, National accounts
- Keywords: Capital account, Capital account liberalization, Capital Account Openness, Capital flows, confidence interval, cost of capital, Crises, current account liberalization, differential effects of capital account liberalization, differential output effect, distributional effects of capital account liberalization, effect of liberalization episode, effects of capital account liberalization policy, elasticity of substitution, Global, Globalization, Income inequality, Inequality, Institutions, Labor share, liberalization episode, output effect, product market deregulation, scope of capital account liberalization reform, WP
IMF Working Paper: "The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data", April 6, 2018.