Geoscience Reference
In-Depth Information
a
Non-Risky
Risky
Factor
Income
Total
Income
-0.0002
0
0.0002
0.0004
0.0006
0.0008
0.001
0.0012
b
Non-Risky
Financial
Income
Risky
Factor
Income
Total
Income
-0.0002
0
0.0002
0.0004
0.0006
0.0008
0.001
0.0012
Fig. 9.9
(
a
) Impact of increased bank-led flows on poor/rich income rati.
Source
: Results of
model simulations. (
b
) Impact of Increased Bank-Led Flows on Rural/Urban Income Ratio.
Source
: Results of model simulations
from these assets. As a result, overall income inequality between rich and poor, and
between rural and urban households, narrows (see Fig.
9.9a, b
).
It is abundantly clear that the repercussions of increased bank-led flows depend
on how banks react. It is much better when banks act prudently and do not take on
increased risk. The problem is, there is no guarantee banks will behave that way.
Given the high frequency of financial crises worldwide, especially since the 1990s,
it implies that most financial institutions on the receiving end of capital inflows tend
to take on more risk. This all suggests policies need to adjust.
9.4.3 What's Next
Despite the risks and potential damage capital flows can cause, no country can stop
them—especially when the spread of returns (interest rates) is large and push
