The Aggregate and Distributional Effects of Financial Globalization : Evidence from Macro and Sectoral Data

We take a fresh look at the aggregate and distributional effects of policies to liberalizeinternational capital flows-financial globalization. Both country- and industry-level resultssuggest that such policies have led on average to limited output gains while contributing tosignificant increases in inequality-that is, they pose an equity-efficiency trade-off. Behindthis average lies considerable heterogeneity in effects depending on country characteristics.Liberalization increases output in countries with high financial depth and those that avoidfinancial crises, while distributional effects are more pronounced in countries with lowfinancial depth and inclusion and where liberalization is followed by a crisis. Difference-indifferenceestimates using sectoral data suggest that liberalization episodes reduce the shareof labor income, particularly for industries with higher external financial dependence, thosewith a higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and thosewith a higher elasticity of substitution between capital and labor. The sectoral resultsunderpin a causal interpretation of the findings using macro data