DP14001 The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data

Author(s): Davide Furceri, Prakash Loungani, Jonathan D. Ostry
Publication Date: September 2019
Keyword(s): Capital account openness, Globalization, inequality
JEL(s): F13, G32, O11
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14001

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.