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Equity market liberalization, credit constraints and income inequality

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  • Sun, Puyang
  • Sen, Somnath
  • Jin, Shujing

Abstract

This paper provides compelling evidence that equity market liberalization, the most efficient way to smooth financial market frictions such as credit constraints, can alleviate persistent cross-dynastic income inequality through increasing the accumulation of human capital. We examine the impact of equity market liberalization on inequality by using the data of 72 countries during 1980-2006. The effect is robust to alternative measurements of equity market liberalization. Furthermore, equity market liberalization is associated with the different effects of credit constraints on the persistence of cross-dynastic income inequality. Finally, it is proved that foreign equity flows benefit the initially less active stock markets more than the active ones, which is important evidence that foreign equity flows act as a substitute for the domestic financial market. This finding emphasizes the importance of equity market liberalization for the poor, which helps to reduce inequality.

Suggested Citation

  • Sun, Puyang & Sen, Somnath & Jin, Shujing, 2012. "Equity market liberalization, credit constraints and income inequality," Economics Discussion Papers 2012-22, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwedp:201222
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    References listed on IDEAS

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    1. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1001-1026.
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    More about this item

    Keywords

    Income inequality; equity market liberalization; human capital; economic growth;

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G0 - Financial Economics - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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