Working Paper: CEPR ID: DP17279
Authors: Stefan Avdjiev; Tsvetana Spasova
Abstract: We conduct a comprehensive empirical investigation of the link between inequality and financial openness. We document that the relationship varies considerably not only over time, but also across the main components of total external liabilities, which have been largely overlooked by the existing literature. In emerging market economies (EMEs), an increase in a country's external liabilities is associated with an initial rise and a subsequent fall in inequality. This appears to be driven by the fact that the channels through which financial openness increases inequality tend to be active immediately, while the inequality-decreasing channels tend to operate with a lag. The link between financial openness and inequality tends to be substantially weaker in advanced economies than in EMEs.
Keywords: financial openness; gini-based inequality measures; foreign direct investments; external liabilities
JEL Codes: F30; F40; O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in external liabilities (F65) | increase in inequality (D31) |
| increase in external liabilities (F65) | decline in inequality (after a few years) (D31) |
| increase in external liabilities (F65) | activation of channels that increase inequality (F61) |
| activation of channels that increase inequality (F61) | increase in inequality (D31) |
| lagged channels that decrease inequality (I24) | decline in inequality (F62) |
| increase in FDI and portfolio debt (F21) | increase in inequality (D31) |
| increase in other investment liabilities (G19) | decline in inequality (after a lag) (D31) |
| external financial openness in AEs (F41) | smaller and more transient impact on inequality (F61) |
| external financial openness in EMEs (F41) | pronounced impact on inequality (F61) |