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WP/22/138
IMF Working Paper
Office of the Executive Director
Inequality and the Structure of Countries’ External Liabilities
Prepared by Philipp Harms, Mathias Hoffmann, Miriam Kohl, and Tobias Krahnke
Authorized for publication by Joerg Stephan
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.
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 inflows. Our empirical results lend some support to this conjecture.
| JEL Classification Numbers: | D31, F21, F34, F36, F41 |
| Keywords: | Portfolio Equity; Foreign direct investment; External debt; External liabilities; Income Inequality |
| Author’s E-Mail Address: | philipp.harms@uni-mainz.de, mathias.hoffmann@bundesbank.de, miriam.kohl@uni-mainz.de, Tkrahnke@imf.org |
| JEL Classification Numbers: | D31, F21, F34, F36, F41 |
| Keywords: | Portfolio Equity; Foreign direct investment; External debt; External liabilities; Income Inequality |
| Author’s E-Mail Address: | philipp.harms@uni-mainz.de, mathias.hoffmann@bundesbank.de, miriam.kohl@uni-mainz.de, Tkrahnke@imf.org |
Title Page
Inequality and the Structure of Countries’ External Liabilities∗
Philipp Harms†
Johannes Gutenberg University
Mainz Miriam Kohl§
Johannes Gutenberg University Mainz
Mathias Hoffmann‡
Deutsche Bundesbank
Tobias Krahnke¶
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 inflows. Our empirical results lend some support to this conjecture.
Keywords: Foreign direct investment, Portfolio equity, External debt, External liabilities, Income inequality
JEL classification: D31, F21, F34, F36, F41.
This paper has benefited from helpful comments by Cian Allen, Geert Bekaert, Eleonora Cavallaro, Bernardo Fanfani, Robert Kollmann, and the participants at the 11th PhD Workshop in Economics of the Collegio Carlo Alberto, Torino, participants at the 2019 INFER Workshop on “New challenges of economic and financial integration”, Bordeaux, participants at the “5th Mainz-Groningen workshop on FDI and Multinational Corporations”, Groningen, participants at the Brown Bag Seminar at the University of Mainz, participants at the European Trade Study Group Annual Conference, Ghent, and participants at an internal IMF Webinar. This paper represents the authors’ personal opinions and do not necessarily reflect the views of the Deutsche Bundesbank and the International Monetary Fund or its staff.
Johannes Gutenberg University Mainz, Gutenberg School of Management and Economics, Jakob-Welder-Weg 4, 55128 Mainz, Germany; Email: philipp.harms@uni-mainz.de.
Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany; Email: mathias.hoffmann@bundesbank.de.
Johannes Gutenberg University Mainz, Gutenberg School of Management and Economics, Jakob-Welder-Weg 4, 55128 Mainz, Germany; Email: miriam.kohl@uni-mainz.de.
International Monetary Fund, Washington, D.C., United States; Email: tkrahnke@imf.org.