Do Private and Public Capital Flows Respond Differently to Income Inequality? Evidence From Emerging Markets and Developing Economies

ABSTRACT Inequality dynamics influence portfolio decisions in both the private and public sectors. In the private sector, increased inequality facilitates covering the fixed costs associated with participating in international financial markets. As society becomes more unequal, a larger proportion of the population can afford to operate in global markets in both directions to take debt and acquire external assets. In the public sector, inequality affects government policies and preferences, particularly fiscal policy and debt dynamics. In this paper we study the link between inequality and capital flows, taking advantage of a new database that differentiates private and public sectors. Higher income inequality is associated with higher total capital inflows and outflows and higher net flows. These patterns are stronger for private flows. Private outflows are more sensitive to financial openness than private inflows.