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Inequality and the Structure of Countries’ External Liabilities
Author:
Philipp Harms
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,
Mathias Hoffmann
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,
Miriam Kohl
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, and
Tobias Krahnke
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Series:
IMF Working Papers
Volume/Issue:
Volume 2022: Issue 138
Language:
English
Publication Date:
08 Jul 2022
DOI:
https://doi.org/10.5089/9798400210372.001
ISBN:
9798400210372
ISSN:
1018-5941
Pages:
32
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
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund