Does Capital Account Liberalization Affect Income Inequality?

45 Pages Posted: 21 Jun 2019

See all articles by Xiang Li

Xiang Li

Halle Institute for Economic Research

Dan Su

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: November 01, 2018

Abstract

This study examines the relationship between capital account liberalization and income inequality. We adopt two empirical strategies, namely the panel fixed effects model and the difference-in-difference model, to provide robust evidence that opening the capital account is associated with an adverse effect on income inequality in developing countries. The main findings are threefold. First, fully liberalizing the capital account is associated with a rise of 0.18 standard deviations in the Gini coefficient in the short-run dynamics and a rise of as large as 0.48 standard deviations on average in the 10 years after liberalization. Second, widening income inequality is the result of the expansion of the income share of richer groups at the cost of poorer groups. The long-term effect of capital account liberalization includes a reduction of the income share of the poorest 20% by 2.37 percentage points, while there is an increase of the income share of the richest 20% by 6.24 percentage points. Third, inward capital account liberalization does more harm to income equality than outward capital account liberalization, and free access to the international bond market and commercial credit deteriorates income inequality the most.

Keywords: Capital Account Liberalization, Income Inequality, Difference-in-Difference, Propensity Score Matching

JEL Classification: D31, F38

Suggested Citation

Li, Xiang and Su, Dan, Does Capital Account Liberalization Affect Income Inequality? (November 01, 2018). Available at SSRN: https://ssrn.com/abstract=3404691 or http://dx.doi.org/10.2139/ssrn.3404691

Xiang Li (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Dan Su

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

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