Sectoral capital flows and income inequality

Abstract

The relationship between capital flows and income inequality has received increased attention in recent years. Using local projection, this paper investigates the impact of sectoral capital flows, encompassing net corporate flows, net bank flows, and net sovereign flows, on income inequality in 83 economies. The findings reveal that a rise in net bank flows tends to decrease inequality, particularly in economies where regulations support extending credit to marginalized sectors. In contrast, an upsurge in net corporate flows exacerbates income inequality, especially in economies characterized by lower labor income and higher equity dividends.