Does Capital Account Liberalization Affect Income Inequality?

Abstract

By adopting an identification strategy of difference-in-difference estimation combined with propensity score matching between liberalized and closed countries, this paper provides robust evidence that opening the capital account is associated with an increase in income inequality in developing countries. Specifically, capital account liberalization, in the long run, is associated with a reduction in the income share of the poorest half by 2.66-3.79 percentage points and an increase in that of the richest 10% by 5.19-8.76 percentage points. Moreover, directions and categories of capital account liberalization matter. The relationship is more pronounced when liberalizing inward and equity capital flows.

Keywords: Capital Account Liberalization; Income Inequality; Gini Coefficient; Income Share

JEL Classification: F38, D63