Does Capital Account Liberalization Affect Income Inequality?
45 Pages Posted: 21 Jun 2019
Date Written: November 01, 2018
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
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