Inequality and the Structure of Countries’ External Liabilities

Author/Editor:

Philipp Harms ; Mathias Hoffmann ; Miriam Kohl ; Tobias Krahnke

Publication Date:

July 8, 2022

Electronic Access:

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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.

Series:

Working Paper No. 2022/138

Subject:

Frequency:

regular

English

Publication Date:

July 8, 2022

ISBN/ISSN:

9798400210372/1018-5941

Stock No:

WPIEA2022138

Pages:

32

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