The Unassuming Economist

Opening up capital markets, unless managed well, can raise inequality. That’s the message of a new working paper by Davide Furceri and me that the IMF released today. Paul Krugman, based on the early evidence from our work, wrote:

“Davide Furceri and Prakash Loungani use an event-study framework — looking at what happens on average after clear changes in policy — to assess the effects of “neoliberal” policy changes (although they don’t put it that way) on inequality. Sure enough, they find that both fiscal austerity and liberalization of international capital movements are followed by noticeable rises in income inequality. So, if you were a ranting leftist, you might say that political attitudes are shaped by class, and that ideological justifications for high inequality are just a veil for class interest. You might also say that “sound” economic policies are really just policies that redistribute income upwards. And it turns out that the econometric evidence more or less supports your rant.”

Well, our evidence holds up to further scrutiny. And the conclusions we’d like you to draw from our work are summarized in our new blog. And then, if you really want to get a break from the in-laws, here’s the paper. Nothing clears the living room better than a statement like “Guys, let me tell you about this fascinating paper – its findings do not imply that countries should not undertake capital account liberalization, but it suggests an additional reason for caution.”

Happy Thanksgiving,
Prakash