Geoscience Reference
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Yet, these two sources are still incomplete. The actual income received by rich
and urban-based households holding financial assets can be well above income
accrued by those who do not hold financial assets. With financial sector liberal-
ization (FSL) and capital account liberalization (KAL), the former are far better
able to reap benefits from a growing financial sector. During the 'bubble' period
following capital inflows (FSAV), they benefit from the increased value of their
financial assets (FIN ASSETS) as well as the income stream generated from those
assets (RN), regardless of what is happening in the real economy. In many cases,
this portion is larger than that generated from factor income. To the extent the
financial sector often grows much faster than the real sector during a boom, the
impact on income distribution can be predicted—the rich earn far more than the
poor, and urban household income grows faster than rural income, both exacer-
bating income inequality.
After the global financial crisis, increased bank-led flows (see again Fig.
9.5
) can
be charted beginning with capital flows (CFLOW) in the bottom right of Fig.
9.7
.
Together with loans (BANKLOAN), these flows directly augment banks' financial
liabilities (FIN LIABS).
21
This alters the rate of return on financial assets (RN) and
financial returns received by asset holders (RN and INC are linked). Financial assets
(RN) also have a two-way relationship with the size and composition of different
agents' assets. Fixed assets (FIXAS) will be used directly for real sector investment
(INVEST), such as in buildings, machinery, etc., while the rest—including financial
assets (FIN ASSETS)—may move indirectly via financial markets, as for example,
funds from equity issuance are used for business investment. Along with govern-
ment spending (GD), consumption expenditure (EXP or CD), exports (E), and
imports (M), this investment (ID) in real terms generates gross domestic product
(RGDP).
22
Increased capital flows (CFLOW) [captured through foreign savings SAV(fr)]
also have macro-financial impacts: pressuring the currency via the exchange rate
(EXR) to appreciate. The resulting trade account (TA) may thus worsen due to
falling exports (E) and increased imports (M). In reality, however, almost all
emerging market economies with large capital inflows respond by imposing some
sort of capital controls—either directly (through taxes or levies for example) or
indirectly (sterilized market intervention). This explains why net-exports in some
countries continue to grow despite increased capital inflows. When net-exports
shrink, the growth of consumption (CD) and investment (ID) can also offset the
decline.
The resulting higher real gross domestic product (RGDP) fuels further financial
sector growth either from strong fundamentals or simply market expectations. This
21
Note that lending (BANKLOAN) is not only determined by the size of a bank's available funds,
but also by changes in net worth and external finance premia of both borrowers and lenders; this
“credit channel” hypothesis was elaborated in Bernanke et al. (
1996
), Adrian and Shin (
2009
),
Stiglitz and Greenwald (
2003
), and Stiglitz (
2001
).
22
Other financial variables can also affect aggregate economic activity by way of the money
market.
