Financial Globalization, Fiscal Policies and the Distribution of Income

Abstract

This paper provides evidence that financial globalization—liberalization of the capital account—makes income distribution more uneven by raising the share of income that goes to the richest income deciles. We also offer evidence that changes in domestic fiscal policies in the aftermath of financial globalization are one channel through which these distributional effects could occur. Specifically, we show that episodes of capital account liberalization are followed by greater fiscal consolidation and reduced fiscal redistribution, both of which lead to increased inequality.