Inequality and the structure of countries’ external liabilities

Philipp Harms, Mathias Hoffmann (), Miriam Kohl () and Tobias Krahnke ()
Additional contact information
Mathias Hoffmann: Deutsche Bundesbank
Miriam Kohl: Johannes Gutenberg University Mainz
Tobias Krahnke: International Monetary Fund

Review of World Economics (Weltwirtschaftliches Archiv), 2024, vol. 160, issue 2, No 10, 585-613

Abstract: Abstract In this paper, we present empirical evidence that higher income inequality is associated with a greater equity share in countries’ external liabilities, and we develop a theoretical model that can explain this observation: In a small open economy with traded and non-traded goods, entry barriers depress entrepreneurial activity in non-traded industries and raise income inequality. The small number of domestic non-traded goods firms leaves room for foreign firms to operate on the domestic market, and it reduces external borrowing. The model thus suggests that barriers to entrepreneurial activity raise both inequality and the equity share in foreign liabilities. Our empirical results lend some support to this conjecture.

Keywords: Foreign direct investment; Portfolio equity; External debt; External liabilities; Income inequality (search for similar items in EconPapers)
JEL-codes: D31 F21 F34 F36 F41 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Inequality and the Structure of Countries’ External Liabilities (2022)
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DOI: 10.1007/s10290-023-00499-0

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