Does the impact of financial liberalization on income inequality depend on financial development? Some new evidence

Abstract

Instead of empirically finding that higher levels of financial development reduce the positive impact of financial liberalization on inequality, as others do, we come up with the opposite result: financial development strengthens the inequality-raising impact of financial liberalization. We suggest that by, e.g., allowing financial liberalization to lead to more volatility and uncertainty, the model of Bumann and Lensink (2016 "Capital Account Liberalization and Income Inequality." Journal of International Money and Finance 61: 143-162.) can be extended as such that also an amplifying instead of reducing effect of financial depth on the impact of financial liberalization on income inequality can be theoretically justified.

The effects of economic globalisation and ethnic fractionalisation on redistribution

“…In contrast, financial globalisation is likely to benefit mostly the higher fractions of the income distribution as they are more likely to earn capital income and be able to invest in foreign countries. De Haan and Sturm (2017) and De Haan et al (2018) show that financial liberalisation, which is related to our de jure financial globalisation measure, indeed increases income inequality. Furceri and Loungani (2018) analyse the distributional effects of capital account liberalisation.…”

“…In our study, we separate results for trade and financial globalisation. Whereas the trade globalisation literature often finds that this form of globalisation does not have a strong impact on inequality and thereby does not have to trigger redistribution measures (Jaumotte et al, 2013;Richardson, 1995;Reuveny and Li, 2003), recent literature focusing on financial integration note clearly an upward pressure on inequality (De Haan and Sturm, 2017;De Haan et al, 2018;Furceri and Loungani, 2018;Van Velthoven et al, 2019). Following this more recent line of literature, we expect that the inequality pressure stemming from financial integration is raising redistribution.…”

What Factors Affect Income Inequality and Economic Growth in Middle-Income Countries?

“…The advantage of the data set is to maximize comparability without losing the broadest coverage. Since its first introduction in 2008, a number of studies have employed the data set to discuss inequality-related issues (Yang and Greaney 2017;De Haan et al 2018).…”

Income distribution and economic crises

“…Heathcote, Perri, and Violante (), Meyer and Sullivan (), and Thompson and Smeeding () all point to the rising wage and income inequality in the United States after the GR, despite redistributive fiscal policy and increased access to financial markets. In contrast to studies showing a negative relationship between financial liberalization and income inequality (see, e.g., Beck, Levine, & Levkov, ; Bumann & Lensink, ), de Haan and Sturm () and de Haan, Pleninger, and Sturm () argue that financial liberalization worsens income inequality, in particular when the financial system is highly developed.…”