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

By Davide Furceri, Prakash Loungani, Jonathan David Ostry

April 6, 2018

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Davide Furceri, Prakash Loungani, and Jonathan David Ostry. The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data, (USA: International Monetary Fund, 2018) accessed September 20, 2024

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.

Subject: 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

Publication Details

Pages:

61
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/083
Stock No:

WPIEA2018083
ISBN:

9781484350898
ISSN:

1018-5941

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