Inequality and the Structure of Countries’ External Liabilities

By Philipp Harms, Mathias Hoffmann, Miriam Kohl, Tobias Krahnke

July 8, 2022

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Philipp Harms, Mathias Hoffmann, Miriam Kohl, and Tobias Krahnke. Inequality and the Structure of Countries’ External Liabilities, (USA: International Monetary Fund, 2022) accessed December 22, 2024

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.

Summary

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.

Subject: Balance of payments, Economic sectors, Foreign corporations, Foreign direct investment, Income, Income inequality, Labor, National accounts, Portfolio investment, Self-employment

Keywords: Barriers to entrepreneurial activity, East Asia, Entry barrier, Equity share, External debt, External liabilities, Foreign corporations, Foreign direct investment, Income, Income Inequality, Portfolio Equity, Portfolio investment, Self-employment, South Asia, Traded-goods firm

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/138
Stock No:

WPIEA2022138
ISBN:

9798400210372
ISSN:

1018-5941

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