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1. Sanction-busting through tax havens

Author:
Kerim Can Kavakli, Giovanna Marcolongo, and Diego Zambiasi
Publication Date:
04-2023
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
Financial sanctions, which aim to economically hurt a target by restricting its access to financial assets and markets, require the ability to identify who owns an asset. Although experts have long claimed that offshore financial centres that offer secrecy (‘tax havens’) undermine sanctions by hiding ownership information, so far data limitations have prevented a rigorous test of this claim. We overcome this constraint using data from the Bank of International Settlements and the Offshore Leaks Database and conduct the first systematic analysis of the role that tax havens play in financial sanction evasion. Our main finding is that sanction targets reduce their funds in sanctioning countries while increasing their funds in tax havens. This displacement effect is stronger when the sanction coalition includes the United States or comprises more FATF or OECD members. Lastly, whether a tax haven is in the sanctioning coalition does not seem to make a difference. These findings confirm that target countries evade sanctions by moving large portions of their funds from sanctioning countries to tax havens. More broadly, our paper highlights a novel and geostrategically important role of tax havens in global finance.
Topic:
Sanctions, Financial Markets, Leaks, and Tax Havens
Political Geography:
Global Focus

2. Energy Markets and the Design of Sanctions on Russia

Author:
Christof Ruhl
Publication Date:
03-2022
Content Type:
Commentary and Analysis
Institution:
Center on Global Energy Policy (CGEP), Columbia University
Abstract:
Sanctions against the citizens, institutions, and products of the Russian Federation are evolving rapidly. Energy sanctions started late, but the number of countries embargoing oil, gas, or coal imports from Russia is expanding. These sanctions are likely to increase global fuel prices while depressing the price of the sanctioned fuel. The experience to date suggests that the current, gradual approach of reducing oil and gas imports from Russia one country at a time may have room to go further. Before the invasion of Ukraine, the sweeping and unprecedented sanctions promised in the event of a Russian invasion were often conceived as a two-pronged pincer movement. The idea was to isolate Russia from the global financial system while limiting its commodity and energy exports. Both moves were aimed at the source of the financial strength of “fortress Russia,” namely, its persistent balance of payment surplus.
Topic:
Energy Policy, International Trade and Finance, Sanctions, Financial Markets, and Conflict
Political Geography:
Russia and Europe

3. Signaling Virtue or Vulnerability? The Changing Impact of Exchange Rate Regimes on Government Bond Yields

Author:
Z. Barta, Lucio Baccaro, and A. Johnston
Publication Date:
01-2022
Content Type:
Working Paper
Institution:
Max Planck Institute for the Study of Societies
Abstract:
Do exchange rate regimes affect the conditions under which developed countries borrow? This paper argues that they do, but their impact on yields depends on the prevailing macroeconomic context. When investors regard inflation as the most relevant risk to bond holdings, monetary union has a distinct advantage over floating and fixed exchange rates because of its credible in-built mechanism to control inflation. However, once default is seen as the most relevant risk, exchange rate rigidity becomes a liability due to its constraining effect on governments’ ability to respond to adverse shocks. We test our argument with a moving window panel analysis for twenty-three OECD countries from 1980 to 2017. We find that before the late 2000s, inflation was penalized under floating and (to a lesser extent) fixed exchange rate regimes, but not in countries in monetary union. Since the 2010s, inflation carries no penalty under any exchange rate regime. Variables linked to default risk (debt and entitlement spending) did not affect yields under any exchange rate arrangements until the mid-2000s. Afterwards, countries in monetary union (and to a lesser extent in fixed exchange rate regimes) were significantly penalized for public debt and entitlement spending, whereas countries with floating regimes were not. Our results speak to the literatures on governments’ institutional commitments and “room to move.”
Topic:
Financial Markets, Bonds, Exchange Rates, and Euro
Political Geography:
Global Focus

4. Signaling Virtue or Vulnerability? The Changing Impact of Exchange Rate Regimes on Government Bond Yields

Author:
Zsófia Barta, Lucio Baccaro, and Alison Johnston
Publication Date:
09-2022
Content Type:
Working Paper
Institution:
Max Planck Sciences Po Center on Coping with Instability in Market Societies (MaxPo)
Abstract:
Do exchange rate regimes affect the conditions under which developed countries borrow? This paper argues that they do, but their impact on yields depends on the prevailing macroeconomic context. When investors regard inflation as the most relevant risk to bond holdings, monetary union has a distinct advantage over floating and fixed exchange rates because of its credible in-built mechanism to control inflation. However, once default is seen as the most relevant risk, exchange rate rigidity becomes a liability due to its constraining effect on governments’ ability to respond to adverse shocks. We test our argument with a moving window panel analysis for twenty-three OECD countries from 1980 to 2017. We find that before the late 2000s, inflation was penalized under floating and (to a lesser extent) fixed exchange rate regimes, but not in countries in monetary union. Since the 2010s, inflation carries no penalty under any exchange rate regime. Variables linked to default risk (debt and entitlement spending) did not affect yields under any exchange rate arrangements until the mid-2000s. Afterwards, countries in monetary union (and to a lesser extent in fixed exchange rate regimes) were significantly penalized for public debt and entitlement spending, whereas countries with floating regimes were not. Our results speak to the literatures on governments’ institutional commitments and “room to move.”
Topic:
International Political Economy, Financial Markets, Bonds, Exchange Rates, and Euro
Political Geography:
Global Focus

5. Financial Market Responses to Government COVID-19 Pandemic Interventions: Empirical Evidence from South-East and East Asia

Author:
Hai Anh La and Riyana Miranti
Publication Date:
04-2021
Content Type:
Research Paper
Institution:
Economic Research Institute for ASEAN and East Asia (ERIA)
Abstract:
This study investigates the impact of various government interventions on the spread of COVID-19 as well as stock markets in South-East and East Asia. It finds that stricter interventions – including gathering restrictions, public event cancellations, and mask requirements – helped mitigate the severity of the pandemic significantly in the region. Total border closures had a moderate effect on flattening COVID-19 spread, especially during the onset of the pandemic. Other policies, such as school closures or stay-at-home orders, worked effectively later in the pandemic. The study also shows evidence of herding behaviours in regional stock markets during the pandemic. School closures, gathering restrictions, stay-at-home orders, domestic travelling bans, robust testing policies, and government income support programmes tended to reduce herding behaviour. More stock market integration is found during the onset of the pandemic, compared to the periods before and later in the pandemic, implying the short-term impact of a sudden shock from COVID-19.
Topic:
Governance, Financial Markets, Pandemic, COVID-19, Stock Markets, and Financial Development
Political Geography:
Asia and Southeast Asia

6. Aviation Market Development in the New Normal Post the COVID-19 Pandemic: An Analysis of Air Connectivity and Business Travel

Author:
Xiaowen Fu, David A. Hensher, Nicole T. T. Chen, and Junbiao Su
Publication Date:
09-2021
Content Type:
Research Paper
Institution:
Economic Research Institute for ASEAN and East Asia (ERIA)
Abstract:
This study quantifies the effects introduced by the COVID-19 pandemic on air connectivity and passenger travel behaviour. Our analysis suggests that the pandemic has led to significant connectivity loss at all airports, especially at large hubs and tourism destinations. Low-cost carriers’ operations at these airports, whose main targets are price-sensitive, non-business travellers, have been significantly reduced, too. There is preliminary evidence that network carriers at hub airports played more important roles amid the pandemic, likely due to the benefits associated with their hub-and-spoke networks. Connectivity losses at the smallest airports tended to be temporary and limited. These airports had limited aviation services to start with and, thus, it was not too costly to maintain the minimum connectivity. Empirical results obtained from a passenger preference study indicate that traveller subgroups are impacted in different ways. When there is no online meeting option, nearly 80% of the respondents prefer, and are willing to pay for, pandemic control measures. These ‘pro-control’ passengers perceive such measures and the associated high costs/fares as valuable and necessary to lower the health-related risks during air travel. When there is an online meeting option, the share of such passengers decreases to 44.5%, with the remaining 55.5% exhibiting disutility for the increased price and time associated with pandemic control measures. The average willingness-to-pay for pandemic control measures decreases significantly, whereas the value of time saved at health checkpoints increases significantly. The aviation industry thus faces a ‘double-hit’ problem: operation costs will increase due to pandemic control measures, and the resultant inconvenience and extra time and costs further reduce travel demand. Unlike previous short pandemics, business travel is likely to suffer with an extended decline until the pandemic is fully controlled. These results call for financial and operational support for aviation services, especially at major airports and tourism destinations. Because these large airports are expected to be profitable post the pandemic, they may resort to low-cost finance from the capital market in the short term. Because the value of time saved at checkpoints is very high, it is more important for government agencies to make the pandemic control and health measures efficient and smooth. For operations such as vaccination records, stakeholders in different countries should cooperate to facilitate seamless control and pleasant air travel experiences.
Topic:
Development, Financial Markets, Business, Public Health, Pandemic, COVID-19, and Travel
Political Geography:
Asia and Southeast Asia

7. China's Financial Opening Accelerates

Author:
Nicholas R. Lardy and Tianlei Huang
Publication Date:
12-2020
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Despite predictions by some observers that the United States and China are headed for a “decoupling,” China’s integration into global financial markets is accelerating. Regulatory reform has opened China’s financial market to many US and other foreign financial institutions. Foreign ownership of onshore Chinese stocks and bonds is growing rapidly and is likely to continue to expand in 2021. And inbound foreign direct investment (FDI) is on track to hit a new record in 2020. This integration is very asymmetric, however. China retains relatively tight control over both outbound direct investment and outflows of portfolio capital. US efforts to roll back the trend of deepening financial integration by threatening to delist Chinese companies traded on US markets and prohibiting any US investment in 35 Chinese companies that the Department of Defense alleges to be linked to the Chinese military appear to be largely symbolic.
Topic:
Financial Markets, Investment, and COVID-19
Political Geography:
China, Asia, and United States of America

8. Primary Dealer Systems in the European Union

Author:
Jenny Preunkert
Publication Date:
06-2020
Content Type:
Research Paper
Institution:
Max Planck Sciences Po Center on Coping with Instability in Market Societies (MaxPo)
Abstract:
States require money to function and therefore every government has to continuously raise new funds. On the financial markets, governments cannot be sure that auctions of their debt will be sufficiently attractive to financial investors, which is why governments usually enter into cooperative agreements with selected banks. The best known and most widespread form of cooperation is the primary dealer system. Primary dealers are banks that agree to participate regularly in government debt auctions and to act as formalized market makers on government debt markets. The article analyzes European primary dealer systems and asks why banks are willing to participate in these systems. I will show that both domestic and foreign banks use their status as primary dealers to build long-term relationships with one or more European governments and to gain an advantage on the global stage. In Bourdieu’s terms, primary dealer banks use their financial capital to accumulate social and symbolic capital.
Topic:
Debt, Economics, International Political Economy, International Trade and Finance, Financial Markets, Banks, and Macroeconomics
Political Geography:
Europe and European Union

9. Emerging Countries in Global Financial Standard Setting: Explaining Relative Resilience and Its Implications

Author:
Andrew Walter
Publication Date:
11-2019
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
This special report explores the role of emerging-country members in the Basel process, a key aspect of global financial standard setting. It argues that this process has been significantly more politically resilient than adjacent aspects of global economic governance, in part because major emerging countries have perceived continuing “intra-club” benefits from participation within it. Most important among these are learning benefits for key actors within these countries, including incumbent political leaders. Although some emerging countries perceive growing influence over the international financial standard-setting process, many implicitly accept limited influence in return for learning benefits, which are valuable because of the complexity of contemporary financial systems and the sustained policy challenges it creates for advanced and emerging countries alike. The importance of learning benefits also differentiates the Basel process from other international economic organizations in which agenda control and influence over outcomes are more important for emerging-country governments. This helps to explain the relative resilience of the Basel process in the context of continued influence asymmetries and the wider fragmentation of global economic governance. The report also considers some reforms that could further improve the position of emerging countries in the process and bolster its perceived legitimacy among them.
Topic:
International Trade and Finance, Financial Markets, Global Political Economy, and Emerging States
Political Geography:
Africa, Europe, Asia, South America, Australia, North America, and Global Focus

10. Assessing China’s Financial Reform: Changing Roles of the Repressive Financial Policies

Author:
Yiping Huang and Tingting Ge
Publication Date:
01-2019
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
When China began economic reform in 1978, it had only one financial institution, the People’s Bank of China (PBOC), which, at that time, served as both the central bank and a commercial bank and accounted for 93 percent of the country’s total financial assets. This was primarily because, in a centrally planned economy, transfer of funds was arranged by the state and there was little demand for financial intermediation. Once economic reform started, the authorities moved very quickly to establish a very large number of financial institutions and to create various financial markets. Forty years later, China is already an important player in the global financial system, including in the banking sector, direct investment, and bond and equity markets. However, government intervention in the financial system remains widespread and serious. The PBOC still guides commercial banks’ setting of deposit and lending rates through “window guidance,” although the final restriction on deposit rates was removed in 2015. Industry and other policies still play important roles influencing allocation of financial resources by banks and capital markets. The PBOC intervenes in the foreign exchange markets from time to time, through directly buying or selling foreign exchanges, setting the central parity, and determining the daily trading band. The regulators tightly manage cross-border capital flows, and the state still controls majority shares of most large financial institutions.
Topic:
Economics, Foreign Exchange, Reform, Financial Markets, and Banks
Political Geography:
China and Asia

11. Belt and Road in Latin America: A regional game changer?

Author:
Pepe Zhang
Publication Date:
10-2019
Content Type:
Policy Brief
Institution:
Atlantic Council
Abstract:
Four new BRI trends to watch: (i) enforcement of transparency, debt, and environmental safeguards; (ii) growing participation of the private sector; (iii) the role of the advanced economies in BRI; and (iv) new BRI sectors beyond infrastructure Governments and companies in Latin America and the Caribbean should engage and help shape an evolving BRI, mindful of both the opportunities and risks involved The United States can play a key role in setting standards for economic development projects in the region and beyond
Topic:
Energy Policy, Environment, Financial Markets, and Trade
Political Geography:
China, Asia, South America, and Latin America

12. China’s economy seeks bottom amid downward pressure in 2019

Author:
Qiyuan Xu
Publication Date:
02-2019
Content Type:
Policy Brief
Abstract:
Proactive fiscal policy will be employed this year to meet the challenge of downward pressure In 2019, the Chinese economy is expected to seek a bottom as a slowdown is inevitable. It is anticipated that it will stabilize at the end of the year or early next year at a growth rate of around 6.3 percent. With China's economy entering a new era, policymakers should focus more on the quality of growth in addition to maintaining a moderately high growth rate. ...... At the same time, China's economy is facing a lot of downward pressuredomestically. First, confidence in the financial market needs to be restored. In2018, China's financial market was hit many times; its stocks, bonds, fundsand internet finance, for example, were all affected. In addition, at present, thewidening credit spreads and the high degree of liquidity between bankscannot be converted into loans to enterprises and other market entities. Facedwith rising market risks and faltering consumer confidence, investors preferlow-risk or risk-free asset allocations.
Topic:
Markets, Financial Markets, Economy, and Fiscal Policy
Political Geography:
China and Asia

13. MFF Negotiations: What Czechs think of the latest development

Author:
Vít Havelka
Publication Date:
12-2019
Content Type:
Special Report
Institution:
Europeum Institute for European Policy
Abstract:
The original goal of the previous European Commission – to finish the post 2020 multiannual financial framework (MFF) negotiations by the end of the year – is shattered. The December European Council did not reach any final decision, so the earliest deadline is the March EC meeting, with a possibility of slipping into German presidency in the second half of 2020. This would leave a very little time for preparation of partnership agreements with the member states, thus potentially leading to disruption in utilization of EU funding. As of now, it seems that the EU has still a long way to go until it reaches agreement over the future MFF. Member states are negotiating not only about the total size of the future European budgets, but also allocations to various headings or system of resources.
Topic:
Budget, European Union, Financial Markets, and Negotiation
Political Geography:
Europe and Czech Republic

14. How Market Sentiment Drives Forecasts of Stock Returns

Author:
Roman Frydman, Nicholas Mangee, and Josh Stillwagon
Publication Date:
04-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We reveal a novel channel through which market participants’ sentiment influences how they forecast stock returns: their optimism (pessimism) affects the weights they assign to fundamentals. Our analysis yields four main findings. First, if good (bad) “news” about dividends and interest rates coincides with participants’ optimism (pessimism), the news about these fundamentals has a significant effect on participants’ forecasts of future returns and has the expected signs (positive for dividends and negative for interest rates). Second, in models without interactions, or when market sentiment is neutral or conflicts with news about dividends and/or interest rates, this news often does not have a significant effect on ex ante or ex post returns. Third, market sentiment is largely unrelated to the state of economic activity, indicating that it is driven by non-fundamental considerations. Moreover, market sentiment influences stock returns highly irregularly, in terms of both timing and magnitude. This finding supports recent theoretical approaches recognizing that economists and market participants alike face Knightian uncertainty about the correct model driving stock returns.
Topic:
Economics, Markets, Financial Markets, Econometrics, and Stock Markets
Political Geography:
United States

15. Financial Sector Cybersecurity Requirements in the Asia-Pacific Region

Author:
William A. Carter and William Crumpler
Publication Date:
04-2019
Content Type:
Working Paper
Institution:
Center for Strategic and International Studies
Abstract:
As the threat of cyberattacks has risen in recent years, financial institutions (FIs) and regulators have taken a range of steps to strengthen the security and resilience of the financial system to cyber threats. In the Asia-Pacific region (APAC), regulators have introduced a raft of new regulations and controls to bolster the resilience of FIs in their jurisdictions. While greater attention to—and engagement on—these issues is important, the development of new regulatory regimes across APAC has created challenges for multinational FIs and regulators, and could hinder the growth of the financial services and fintech industries within the region. We reviewed the cybersecurity requirements impacting the financial industry in five key jurisdictions, including the largest regional financial centers and consumer markets in APAC: Singapore, Hong Kong, Japan, China, and India. Through a combination of open-source research and on-the-ground interviews—with regulators; local, regional, and global FIs; policymakers; technology experts; and academics—we sought to understand the range of requirements and approaches from different regulators across the APAC region, and the ways in which they impact cyber risks to the regional financial system. Harmonizing regulators’ approaches to cybersecurity regulation in the region could help reduce systemic risks, improve regulatory efficiency, and make it easier for FIs across APAC to grow. This will not be easy and will require sustained engagement on multiple levels. Cyber threats are a transnational issue and will require a transnational response, particularly in highly integrated regions like APAC. Strengthening the security and resiliency of financial networks across the region will require looking at FIs from an enterprise perspective and understanding the cyber risks they face from the perspective of defenders, not the narrow lens of national borders. This will require principles-based approaches that allow for the wide range of business models and capacities of FIs and regulators across the region, and consolidated auditing, examination, and testing procedures to ensure that regulators have an accurate picture of the risks and controls at institutions under their care. Ultimately, regulators’ goals must be to ensure that strong security and resilience, not redundant compliance, is the focus for FIs.
Topic:
Security, Cybersecurity, and Financial Markets
Political Geography:
Global Focus

16. 3 Reasons Why the Fed Wants to Keep Raising Interest Rates

Author:
Martin S. Feldstein
Publication Date:
02-2019
Content Type:
Commentary and Analysis
Institution:
Belfer Center for Science and International Affairs, Harvard University
Abstract:
Earlier this month, the Federal Reserve’s policy-setting Federal Open Market Committee voted unanimously to increase the short-term interest rate by a quarter of a percentage point, taking it from 2.25% to 2.5%. This was the fourth increase in 12 months, a sequence that had been projected a year ago, and the FOMC members also indicated that there would be two more quarter-point increases in 2019. The announcement soon met with widespread disapproval.
Topic:
International Affairs and Financial Markets
Political Geography:
Global Focus

17. Financing for the Polish economy: prospects and threats

Author:
Andrzej Halesiak, Ernest Pytlarczyk, Mariusz Wieckowski, and Stefan Kawalec
Publication Date:
06-2019
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
In a properly functioning economy, finance has important role to play in making main sectors of the economy – production, trade, services – to thrive. One of the most important – and often unappreciated – channels by which finance affects the processes taking place in the real sector is the selection of investment projects. It is banks and financial intermediaries that to a great degree decide which projects are carried out in the economy at a given moment, and which are not. If financial institutions are excessively conservative (which today is often an effect of the tight regulatory environment), they will prefer low-risk projects with high levels of collateral (e.g. mortgage loans). A financial system oriented this way will rarely be a source of problems, but at the same time not inclined to finance innovative projects with high potential to benefit the economy. Thus for any economy, a very important question is whether its regulatory framework smartly balances both of these aspects: financial system safety and the need to take on risk. When analyzing the functioning of the financial system, it’s worth noting the gradual blurring of certain traditional boundaries. While decades ago households were the main source of savings in the economy, and the borrowers were enterprises and the public sector, today both households and companies are on both sides, as suppliers and receivers of capital. The boundary between the functioning of banks and capital markets is also increasingly blurred. Today banks operate broadly through the capital market, both as acquirers of securities and as issuers. One area that has been developing dynamically in recent years is the flow of financial resources bypassing traditional intermediaries: direct lending through the peer-to-peer (P2P - direct financing of a project by business partners) and crowdfunding platforms (fundraising by collecting money online).
Topic:
Demographics, GDP, Financial Markets, Economy, Banks, Investment, and Trade
Political Geography:
Europe and Poland

18. Financial Inclusion and its Impact on Employment Creation in Botswana

Author:
Koketso Molefhi
Publication Date:
03-2019
Content Type:
Working Paper
Institution:
Botswana Institute for Development Policy Analysis
Abstract:
The study examines the impact of financial inclusion on employment creation in Botswana using quarterly time series data for the period 2004-2016. Using Autoregressive Distributed Lag (ARDL) model, we find that availability of bank branches, ownership of bank account and borrowing from the commercial bank have a positive impact on employment creation in the short run. Similarly, in the long run, availability of bank branches, ownership of bank account has a positive relationship with employment creation in the long run. Depositors with commercial banks has a negative bearing on employment creation, both in the short run and in the long run. Therefore, policies should be aimed at ensuring easy access into the financial sector by way of reducing costs associated with account opening as well as creating affordable deposit and borrowing windows to the financially excluded groups.
Topic:
Economics, Labor Issues, Employment, Finance, Financial Markets, and Macroeconomics
Political Geography:
Africa and Botswana

19. From Silicon Valley to Shenzhen: Dollar Exposures in Chinese Fintech

Author:
Michael B Greenwald
Publication Date:
12-2018
Content Type:
Commentary and Analysis
Institution:
Belfer Center for Science and International Affairs, Harvard University
Abstract:
In the post-9/11 era, Washington has waged innovative campaigns against terrorism finance, sanctions evasion, and money laundering. Leveraging America’s heavyweight status in the international financial system, the United States Treasury has isolated and bankrupted rogue regimes, global terrorists, and their enablers. As financial technology transforms global business, the traditional financial system faces new competition across a suite of offerings, ranging from brokerage services to peer to peer lending. In no area is this clearer than in mobile payments, where a global hegemon lies ready to exercise its weight, and it is not the United States
Topic:
International Relations, International Affairs, and Financial Markets
Political Geography:
Global Focus

20. Financial Market Integration and Income Inequality

Author:
Jae Wook Jung and Kyunghun Kim
Publication Date:
07-2018
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Benefits of financial market integration include cheaper and alternative op-tions of saving and borrowing for households and entrepreneurs. In the global financial market, asset choices for households widen so that individu-als can manage their idiosyncratic income risk more effectively. On the other hand, financial market integration makes investors who hold foreign assets more vulnerable to global financial shocks. In the recent financial crisis, finan-cial market distress which initially arose in the U.S. had an enormous impact on the peripheral countries. This example shows that the strong shock prop-agation occurs via integrated financial markets. The existing literature shows that financial market integration has a sizable impact not only on business cycles in the short run, but also on economic growth in the long run. However, there has been little attention to income distribution, specifically in related to the financial market integration. In this paper, we fill the void in the literature by focusing on the following two styl-ized facts: income inequality has been exacerbated in most countries over the past two decades, and the financial market has been integrated across coun-tries during the same period. In particular, we answer three research questions to investigate the relationship between the two facts. First, how does financial market integration affect income inequality? Second, how do financial market integration and financial market development interact to change income ine-quality? Third, what components do theoretical model need to explain the interaction effect of financial market development and integration on income inequality? We test hypotheses that the effect of financial market openness on inequality is conditional on the level of domestic financial market development when the financial market opens. An empirical study with panel data comprised of 174 countries for the period 1995-2017 finds that the overall effect of finan-cial integration on income inequality is nonlinear. Financial market integration creates the intensive and extensive margins of credit supply which may de-pend on the development level of financial market disproportionally. This paper uncovers a novel empirical evidence that financial market integration and financial market development interact to change income inequality. When other things are controlled, the effect of financial market integration on in-come inequality depends on financial market development. In a country with underdeveloped financial market, income inequality gets worse as financial market opens. On the other hand, when financial market is highly developed, the effect of financial market openness on income inequality is mostly insig-nificant in a statistical sense. The results are still valid with different measures of financial market development, integration, and income inequality. We check that the results are robust as an endogeneity issue among financial market development and integration is controlled. We also suggest some important structures for the conventional economic model to account for our empirical finding as theoretical implications. Based on these implications, extensions of the conventional small open economy model with financial constraints having suggested components such as het-erogeneous holdings of foreign assets across income and asset levels and entrepreneurial shocks will be necessary to understand an interaction of fi-nancial market openness and domestic market development on the distribu-tion of income in a country. Our finding also echoes that studying an eco-nomic mechanism in which economic growth, financial market outcomes, and inequality are endogenously determined.
Topic:
Development, Income Inequality, Financial Markets, Economic Growth, and Integration
Political Geography:
Global Focus