Capital Flows and Income Inequality

2020-14 | March 1, 2023

We document empirical evidence that surges in capital inflows (outflows) raise (reduce) income inequality. We study the mechanism through which changes in capital flows and capital account policies can influence income distributions in a small open economy model. Our model features heterogeneous agents and financial frictions, with banks intermediating between household savings and entrepreneur investment. Inflow surges disproportionately raise entrepreneur income, exacerbating inequality, while increases in outflows boost the share of household income, alleviating inequality. Under capital-skill complementarity, capital account liberalization that induces net capital inflows raises both the skill wage premium and overall income inequality. These predictions are in line with our empirical evidence.

Erratum: August 2023 (pdf, 316 kb)

Article Citation

Zhang, Jingyi, Mark M. Spiegel, and Zheng Liu. 2020. “Capital Flows and Income Inequality,” Federal Reserve Bank of San Francisco Working Paper 2020-14. Available at https://doi.org/10.24148/wp2020-14

About the Authors
Zheng Liu
Zheng Liu is a vice president and director of the Center for Pacific Basin Studies in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Zheng Liu
Mark Spiegel
Mark Spiegel is a senior policy advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Mark Spiegel