Capital Flow Surges and Rising Income Inequality

Diwan, Renuka; Liu, Zheng; Spiegel, Mark M.

Journal Article

Capital Flow Surges and Rising Income Inequality

Abstract: Surges of foreign investment into developing countries can amplify economic stress and potentially undermine their financial stability. New evidence suggests that excessive foreign capital inflows can also increase income inequality in emerging economies. Research shows that, as low global interest rates trigger more investment, those inflow surges benefit entrepreneurs by raising their returns, while lowering household earnings on bank deposits within the countries. The potential impact on income inequality provides another reason beyond financial stability for resisting abrupt surges in capital inflows.

Keywords: developing countries; emerging economies; foreign capital inflows; income inequality; financial stability;