Capital Account Liberalization and Inequality

A new paper by Xiang Li and Dan Su highlights the possible relationship between capital account liberalization and inequality:

“This study adds empirical evidence to the literature linking external financial liberalization and income inequality. Its contributions are as follows. First, we provide evidence of the effect of opening the capital account on the income shares of different income groups. The dependent variable of previous studies is usually the nationwide Gini index. The use of income share data in this study cannot only show the effects on the overall distributional effect but also explain specifically which group benefits or loses the most. Second, we distinguish the direction and categories of capital account liberalization by using an updated measure from Fernández et al. (2016). The impacts of various dimensions of capital account liberalization can help narrow the discussion on specific opening policies . Third, we employ the difference-in-difference (DID) approach combined with propensity score matching (PSM) to estimate the impact of opening the capital account on income inequality in a 20-year window. In this way, we mitigate the endogeneity concern of conventional panel fixed effects models because the DID method tries to construct an experiment by selecting two groups of similar countries and then randomly liberalizing the capital account of the treated group while keeping that of the control group closed. In this way, we interpret the findings of this study one step closer to causality”


Posted by at 8:55 PM

Labels: Inclusive Growth


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