Working Paper: CEPR ID: DP14001
Authors: Davide Furceri; Prakash Loungani; Jonathan D. Ostry
Abstract: 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. The country-level results are based on 228 capital account liberalization episodes spanning 149 advanced and developing economies from 1970 to the present. Difference-in-difference estimation using industry-level data for 23 advanced economies suggests that liberalization episodes reduce the share of labor income, particularly for industries with higher external financial dependence, higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and higher elasticity of substitution between capital and labor.
Keywords: globalization; inequality; capital account openness
JEL Codes: F13; G32; O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Capital account liberalization (F32) | Limited output gains (D29) |
| Capital account liberalization (F32) | Increase in inequality (D31) |
| Capital account liberalization (F32) | Reduction in labor share of income (E25) |
| Financial dependence, propensity to use layoffs, elasticity of substitution (J63) | Reduction in labor share of income (E25) |