Capital Openness and Income Inequality: A Cross-Country Study and the Role of CCTs in Latin America

30 Pages Posted: 10 Oct 2016

See all articles by Guillermo Lagarda

Guillermo Lagarda

Global Development Policy Center Boston University

Jennifer Linares

Inter-American Development Bank (IDB)

Kevin P. Gallagher

Boston University

Date Written: June 11, 2016

Abstract

Recently, capital controls have made a comeback as both policymakers and academia have questioned the net benefits of liberalization and economic growth, especially after the 2008 Great Recession. While that literature has largely concluded that capital account liberalization may have detrimental effects on growth and accentuate financial instability in emerging markets, relatively little literature has examined the impacts of capital account liberalization on income inequality. Thus, this paper investigates the extent to which liberalization is beneficial for countries, conditional on institutional strength and financial depth. We specifically explore the differential impacts of capital account liberalization on income inequality during periods of economic expansion and contraction. The main findings suggest that the net impact of financial liberalization on income inequality is ambiguous during periods of economic expansion but detrimental during contractions. However, we also find that capital account openness needs not to be detrimental on income inequality if institutions are strong or - as it is the case in Latin America - if social safety nets are available.

Keywords: Capital Liberalization, Capital Account, Inequality, Income, Financial Depth, Institutional Strength, Safety Nets

JEL Classification: D30, E25, E44, E60, F10, F20, F38, F62, G01

Suggested Citation

Lagarda, Guillermo and Linares, Jennifer and Gallagher, Kevin P., Capital Openness and Income Inequality: A Cross-Country Study and the Role of CCTs in Latin America (June 11, 2016). Available at SSRN: https://ssrn.com/abstract=2849463 or http://dx.doi.org/10.2139/ssrn.2849463

Guillermo Lagarda (Contact Author)

Global Development Policy Center Boston University ( email )

53 Bay State Road
Boston, MA 02215
United States

Jennifer Linares

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Kevin P. Gallagher

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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