The Effects of Financial Globalization on Global Imbalances, Employment and Inequality

This paper reviews the empirical evidence for the macroeconomic effects of financial globalization and discusses why several of the expected benefits have failed to materialize, in terms of both long-term economic growth and the vulnerability of low-income households. The indirect effects that financial liberalization may have on inequality are discussed in the light of its impact on domestic policy-making. The paper also demonstrates the existence of a trade-off between higher trend growth and more inequality when countries open their capital accounts, due to the tendency of excess financial liquidity to generate lending booms.