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Growth divergence and income inequality in OECD countries:the role of trade and financial openness

Author

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  • Enrico D'Elia

    (Ministry of Economy and Finance)

  • Roberta De Santis

    (ISTAT)

Abstract

DThis paper analyzes trade and financial openness effects on growth and income inequality in 35 OECD countries. Our model takes into account both short run and long run effects of factors explaining income divergence between and within the countries. We estimate, for the period 1995-2016, an error correction model in which per capita GDP and inequality are driven by changes over time of selected factors and by the deviation from a long run relationship. Stylised facts suggest that trade and financial openness reduce the growth gaps across the countries but not income inequality, and the effects of finance are stronger in high income countries. Nevertheless, low and middle income countries benefit more from international trade. Our contribution to the existing literature is threefold: i) we study the short and long run effects of trade and financial openness on income level and distribution, ii) we focus on developed countries (OECD) rather than on developing and iii) we provide a sensitivity analysis including in our baseline equation an institutional indicator, a trade agreement proxy and a dummy of global financial crisis. Estimates results indicate that trade openness significantly improved the conditions of low income countries both in short and long run mostly, consistently with the catching up theory. It also decreased inequality, but only in low and middle income countries. Differently financial openness had a positive and significant impact only in the short run on middle income countries and increased income disparities within countries in the short term in low income countries and in the long term in high income countries.

Suggested Citation

  • Enrico D'Elia & Roberta De Santis, 2018. "Growth divergence and income inequality in OECD countries:the role of trade and financial openness," Working Papers LuissLab 18140, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  • Handle: RePEc:lui:lleewp:18140
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    References listed on IDEAS

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    Cited by:

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    2. Ribeiro, Ana Paula & Carvalho, Vitor & Ferreira, Mariana, 2020. "The effect of globalization on wage inequality: an application to the European Union before the Great Recession," MPRA Paper 110697, University Library of Munich, Germany.
    3. Dimitry Kochenov, 2020. "Genuine Purity of Blood: The 2019 Report on Investor Citizenship and Residence in the European Union and its Litigious Progeny," LEQS – LSE 'Europe in Question' Discussion Paper Series 164, European Institute, LSE.
    4. G. P. Manish & Colin O’Reilly, 2019. "Banking regulation, regulatory capture and inequality," Public Choice, Springer, vol. 180(1), pages 145-164, July.
    5. Huang, Kaixing & Yan, Wenshou & Sim, Nicholas & Guo, Yuqing & Xie, Fang, 2022. "Can trade explain the rising trends in income inequality? Insights from 40 years of empirical studies," Economic Modelling, Elsevier, vol. 107(C).
    6. Goran Radosavljeviæ & Mihajlo Babin & Miloš Eriæ & Jelisaveta Lazareviæ, 2020. "Income convergence between Southeast Europe and the European Union," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 38(2), pages 499-519.

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    More about this item

    Keywords

    Bank capitalization; zombie lending; capital misallocation;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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