Financial Liberalization and Income Inequality: On the Heterogenous Effects of Different Reforms

Alexander Ludwig, Alexander Monge-Naranjo, Ctirad Slavik and Faisal Sohail

No 895, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: This paper estimates the effects of financial market deregulation on income inequality in the US. We find that different financial reforms had different implications for income inequality. Reforms in the 1970s through the 1980s, namely the removal of restrictions on intra- and inter-state banking and the elimination of ceilings on interest rates, decreased inequality by increasing incomes at the bottom of the income distribution, mainly of younger workers. In contrast, the 1999 repeal of the Glass-Steagal act increased inequality by increasing incomes at the top of the income distribution. We also document strong indirect effects of all three reforms on sectors other than Finance and Insurance (FI). Direct effects on workers in FI are mainly strong for the repeal of the Glass-Steagal act. Our findings suggest that for a better understanding of trends in inequality one should carefully distinguish between different types of financial market reforms, both empirically and theoretically.

Date: 2019
New Economics Papers: this item is included in nep-cba
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