Journal article
Income growth and inequality: The threshold effects of trade and financial openness
GC Lim, PD McNelis
Economic Modelling | ELSEVIER SCIENCE BV | Published : 2016
Abstract
Empirical studies about whether trade and financial openness lead to favourable Gini outcomes yield mixed results and theoretical work suggest that the effects likely depend on the stage of economic development and the nature of the production structure. This paper proposes a model of a small open economy with two key components – a component with heterogeneous agents earning a range of incomes and a component with traded and non-traded goods and associated financial linkages. Simulations show that both trade and financial openness can lead to improvements in both income growth and equality once an economy crosses a critical threshold in capital intensity and in the use of imported intermedi..
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Funding Acknowledgements
This paper is part of an IMF research project on macroeconomics policy in low-income countries supported by the UK Department for International Development (DFID). The paper was presented at an IMF Conference in January 2014. We thank participants for their comments. The views expressed in this paper are those of the authors and do not necessarily reflect those of the DFID or the IMF. We also thank participants at the CEF 2015 meetings in Taipei, and two anonymous referees for very helpful comments. McNelis' research for this project took place while he was a visiting scholar at the Department of Economic Studies at the Bank of Portugal.