Inequality and the Structure of Countries’ External Liabilities

Philipp Harms, Mathias Hoffmann, Miriam Kohl and Tobias Krahnke

No 2022/138, IMF Working Papers from International Monetary Fund

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 nontraded goods, entry barriers depress entrepreneurial activity in nontraded industries and raise income inequality. The small number of domestic nontraded-goods firms leaves room for foreign firms to operate on the domestic market, and it reduces external borrowing. The model suggests that barriers to entrepreneurial activity could be conducive to attract equity-type capital inows. Our empirical results lend some support to this conjecture.

Keywords: Portfolio Equity; Foreign direct investment; External debt; External liabilities; Income Inequality; entry barrier; equity share; barriers to entrepreneurial activity; traded-goods firm; Income; Portfolio investment; Self-employment; South Asia; East Asia; Foreign corporations (search for similar items in EconPapers)
Pages: 32
Date: 2022-07-08
New Economics Papers: this item is included in nep-fdg and nep-opm
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Journal Article: Inequality and the structure of countries’ external liabilities (2024)
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