Capital Openness and Income Inequality: A Cross-Country Study and The Role of CCT in Latin America

LaGarda, Guillermo and Gallagher, Kevin and Linares, Jennifer (2016): Capital Openness and Income Inequality: A Cross-Country Study and The Role of CCT in Latin America.

Abstract

Recently, capital controls have made a comeback as both policymakers and academia have questioned the net benefits of liberalization and economic growth, especially after the 2008 Great Recession. While that literature has largely concluded that capital account liberalization may have detrimental effects on growth and accentuate financial instability in emerging markets, relatively little literature has examined the impacts of capital account liberalization on income inequality. Thus, this paper investigates the extent to which liberalization is beneficial for countries, conditional on institutional strength and financial depth. We specifically explore the differential impacts of capital account liberalization on income inequality during periods of economic expansion and contraction. The main findings suggest that the net impact of financial liberalization on income inequality is ambiguous during periods of economic expansion but detrimental during contractions. However, we also find that capital account openness needs not to be detrimental on income inequality if institutions are strong or - as it is the case in Latin America -if social safety nets are available.

• Item Type: MPRA Paper
• Language: English
• Keywords: Capital Liberalization, Capital Account, Inequality, Income, Financial Depth, Institutional Strength, Safety Nets
• Subjects: D - Microeconomics > D3 - Distribution > D31 - Personal Income, Wealth, and Their Distributions; F - International Economics > F2 - International Factor Movements and International Business; F - International Economics > F2 - International Factor Movements and International Business > F20 - General; F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; F - International Economics > F3 - International Finance > F38 - International Financial Policy: Financial Transactions Tax; Capital Controls; I - Health, Education, and Welfare > I3 - Welfare, Well-Being, and Poverty > I30 - General

References

S. Albanesi. Inflation and inequality. Journal of Monetary Economics, 54(4):1088–1114, 2007.

A. Alesina and R. Perotti. Income distribution, political instability, and investment. European economic review, 40 (6):1203–1228, 1996.

J. Anderson. Capital account controls and liberalization: Lessons for india and china. In India’s and China’s recent experience with reform and growth, pages 264–274. Springer, 2005.

V. Arora, K. Habermeier, J. D. Ostry, and R. Weeks-Brown. The liberalization and management of capital flows: Aninstitutional view. Revista de Econom´ıa Institucional, 15(28):205–255, 2013.

C. Arteta, B. Eichengreen, and C. Wyplosz. When does capital account liberalization help more than it hurts? Technical report, National bureau of economic research, 2001.

A. B. Atkinson and S. Morelli. Economic crises and inequality. UNDP-HDRO Occasional Papers, (2011/6), 2011.

S. Bumann and R. Lensink. Capital account liberalization and income inequality. Journal of International Money and Finance, 61:143–162, 2016.

M. Bussiere and M. Fratzscher. Financial openness and growth: Short-run gain, long-run pain?*. Review of International Economics, 16(1):69–95, 2008.

M. D. Chinn and H. Ito. A new measure of financial openness. Journal of comparative policy analysis, 10(3):309–322, 2008.

S. Claessens and E. Perotti. Finance and inequality: Channels and evidence. Journal of Comparative Economics, 35 (4):748–773, 2007.

O. Coibion, Y. Gorodnichenko, L. Kueng, and J. Silvia. Innocent bystanders? monetary policy and inequality in the us. Technical report, National Bureau of Economic Research, 2012.

M. Das and S. Mohapatra. Income inequality: the aftermath of stock market liberalization in emerging markets. Journal of Empirical Finance, 10(1):217–248, 2003.

A. Fernandez, M. W. Klein, A. Rebucci, M. Schindler, and M. Uribe. Capital control measures: A new dataset. Technical report, National Bureau of Economic Research, 2015.

M. A. Ferreira and P. A. Laux. Portfolio flows, volatility and growth. Journal of International Money and Finance, 28 (2):271–292, 2009.

D. Furceri. Capital Account Liberalization and Inequality. International Monetary Fund, 2015.

K. Gallagher et al. The global governance of capital flows: New opportunities, enduring challenges. Political Economy Research Institute Working Paper, (283), 2012.

R. Glick, X. Guo, and M. Hutchison. Currency crises, capital-account liberalization, and selection bias. The Review of Economics and Statistics, 88(4):698–714, 2006.

C. Goldin and L. F. Katz. Long-run changes in the us wage structure: narrowing, widening, polarizing. Technical report, National Bureau of Economic Research, 2007.

P.-O. Gourinchas and O. Jeanne. The elusive gains from international financial integration. The Review of Economic Studies, 73(3):715–741, 2006.

A. E. Harrison et al. Has globalization eroded labor’s share? some cross-country evidence, 2002.

E. Helleiner. The contemporary reform of global financial governance: Implications of and lessons from the past. Oxford University Press, 2011.

T. F. Hellmann, K. C. Murdock, and J. E. Stiglitz. Liberalization, moral hazard in banking, and prudential regulation: Are capital requirements enough? American economic review, pages 147–165, 2000.

P. B. Henry. Capital account liberalization, the cost of capital, and economic growth. Technical report, National Bureau of Economic Research, 2003.

P. B. Henry. Capital account liberalization: Theory, evidence, and speculation. Technical report, National Bureau of Economic Research, 2006.

M. W. Klein and G. P. Olivei. Capital account liberalization, financial depth, and economic growth. Journal of International Money and Finance, 27(6):861–875, 2008.

A. Kose and E. Prasad. Capital accounts: Liberalize or not. Washington DC: International Monetary Fund http://www.imf.org/external/pubs/ft/fandd/basics/capital. htm (accessed February 03, 2012), 2012.

P. R. Lane and G. M. Milesi-Ferretti. The external wealth of nations mark ii: Revised and extended estimates of foreign assets and liabilities, 1970–2004. Journal of international Economics, 73(2):223–250, 2007.

M. Larrain. Capital account opening and wage inequality. Review of Financial Studies, page hhu088, 2014.

R. I. McKinnon and H. Pill. Credible liberalizations and international capital flows: The "overborrowing syndrome”. In Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7–50. University of Chicago Press, 1996.

E. S. Prasad and R. Rajan. A pragmatic approach to capital account liberalization. Technical report, National Bureau of Economic Research, 2008.

D. Quinn. The correlates of change in international financial regulation. American Political science review, 91(03): 531–551, 1997.

D. Quinn, M. Schindler, and A. M. Toyoda. Assessing measures of financial openness and integration. IMF Economic Review, 59(3):488–522, 2011.

D. P. Quinn. Capital account liberalization and financial globalization, 1890–1999: a synoptic view. International Journal of Finance & Economics, 8(3):189–204, 2003.

D. P. Quinn and A. M. Toyoda. Does capital account liberalization lead to growth? Review of Financial Studies, 21 (3):1403–1449, 2008.

C. M. Reinhart and V. R. Reinhart. Capital flow bonanzas: an encompassing view of the past and present. Technical report, National Bureau of Economic Research, 2008.

C. D. Romer and D. H. Romer. A new measure of monetary shocks: Derivation and implications, manuscript. University of California, Berkeley, 2004.

M. Schindler. Measuring financial integration: A new data set. IMF Staff Papers, pages 222–238, 2009.

S. Soares, R. G. Osorio, F. V. Soares, M. Medeiros, and E. Zepeda. Conditional cash transfers in Brazil, Chile and Mexico: impacts upon inequality. Estudios economicos, (1):207–224, 2009.

F. Solt. The standardized world income inequality database (swiid), 2014.

M. Stampini and L. Tornarolli. The growth of conditional cash transfers in latin america and the caribbean: did they go too far? Technical report, IZA Policy Paper, 2012.

Y. Wang. Capital account liberalization: The case of korea. Korea Institute of International Economic Policy, 2002.