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Inequality and the structure of countries’ external liabilities

Author

Listed:
  • Philipp Harms

    (Johannes Gutenberg University Mainz)

  • Mathias Hoffmann

    (Deutsche Bundesbank)

  • Miriam Kohl

    (Johannes Gutenberg University Mainz)

  • 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 non-traded goods, entry barriers depress entrepreneurial activity in non-traded industries and raise income inequality. The small number of domestic non-traded goods firms leaves room for foreign firms to operate on the domestic market, and it reduces external borrowing. The model thus suggests that barriers to entrepreneurial activity raise both inequality and the equity share in foreign liabilities. Our empirical results lend some support to this conjecture.

Suggested Citation

  • Philipp Harms & Mathias Hoffmann & Miriam Kohl & Tobias Krahnke, 2024. "Inequality and the structure of countries’ external liabilities," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 160(2), pages 585-613, May.
    • Handle: RePEc:spr:weltar:v:160:y:2024:i:2:d:10.1007_s10290-023-00499-0
    DOI: 10.1007/s10290-023-00499-0
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    Keywords

    Foreign direct investment; Portfolio equity; External debt; External liabilities; Income inequality;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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