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The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data

Author

Listed:
  • Davide Furceri
  • Mr. Prakash Loungani
  • Mr. Jonathan David 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—that is, they pose an equity–efficiency trade-off. Behind this average lies considerable heterogeneity in effects depending on country characteristics. Liberalization increases output in countries with high financial depth and those that avoid financial crises, while distributional effects are more pronounced in countries with low financial depth and inclusion and where liberalization is followed by a crisis. Difference-indifference estimates using sectoral data suggest that liberalization episodes reduce the share of labor income, particularly for industries with higher external financial dependence, those with a higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and those with a higher elasticity of substitution between capital and labor. The sectoral results underpin a causal interpretation of the findings using macro data.

Suggested Citation

  • Davide Furceri & Mr. Prakash Loungani & Mr. Jonathan David Ostry, 2018. "The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data," IMF Working Papers 2018/083, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2018/083
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    More about this item

    Keywords

    WP; confidence interval; liberalization episode; Globalization; Inequality; Capital Account Openness; Crises; Institutions; elasticity of substitution; cost of capital; differential output effect; product market deregulation; output effect; differential effects of capital account liberalization; distributional effects of capital account liberalization; effect of liberalization episode; scope of capital account liberalization reform; effects of capital account liberalization policy; current account liberalization; Capital account liberalization; Labor share; Capital account; Income inequality; Capital flows; Global;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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