Capital flows and income inequality

Liu, Zheng; Spiegel, Mark; Zhang, Jingyi

Capital flows and income inequality

Zheng Liu, Mark Spiegel and Jingyi Zhang

Journal of International Economics, 2023, vol. 144, issue C

Abstract: We document empirical evidence that surges in capital inflows (outflows) raise (reduce) income inequality. We study the mechanism through which changes in capital flows and capital account policies can influence income distributions in a small open economy model. Our model features heterogeneous agents and financial frictions, with banks intermediating between household savings and entrepreneur investment. Inflow surges disproportionately raise entrepreneur income, exacerbating inequality, while increases in outflows boost the share of household income, alleviating inequality. Under capital-skill complementarity, capital account liberalization that induces net capital inflows raises both the skill wage premium and overall income inequality. These predictions are in line with our empirical evidence.

Keywords: Capital flows; Income distribution; Heterogeneous agents; Capital-skill complementarity; Financial frictions; Small open economy (search for similar items in EconPapers)
JEL-codes: D63 F32 F38 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:144:y:2023:i:c:s0022199623000624

DOI: 10.1016/j.jinteco.2023.103776

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