Davide Furceri, Prakash Loungani, and Jonathan Ostry
INTERNATIONAL MONETARY FUND
We take a fresh look at the aggregate and distributional effects of policies to liberalize
international capital flows-financial globalization. Both country- and industry-level results
suggest that such policies have led on average to limited output gains while contributing to
significant increases in inequality-that is, they pose an equity-efficiency trade-off. Behind
this average lies considerable heterogeneity in effects depending on country characteristics.
Liberalization increases output in countries with high financial depth and those that avoid
financial crises, while distributional effects are more pronounced in countries with low
financial depth and inclusion and where liberalization is followed by a crisis. Difference-indifference
estimates using sectoral data suggest that liberalization episodes reduce the share
of labor income, particularly for industries with higher external financial dependence, those
with a higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and those
with a higher elasticity of substitution between capital and labor. The sectoral results
underpin a causal interpretation of the findings using macro data.