DP8893 Financial Globalization, Inequality, and the Raising of Public Debt

Author(s): Marina Azzimonti, Eva de Francisco, Vincenzo Quadrini
Publication Date: September 2012
Keyword(s): Financial integration, Government debt, Income inequality
JEL(s): E60, F59
Programme Areas: International Macroeconomics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8893

During the last three decades, the stock of government debt has increased in most developed countries. During the same period, we also observe a significant liberalization of international financial markets and an increase in income inequality in several industrialized countries. In this paper we propose a multicountry political economy model with incomplete markets and endogenous government borrowing and show that governments choose higher levels of public debt when financial markets become internationally integrated and inequality increases. We also conduct an empirical analysis using OECD data and find that the predictions of the theoretical model are supported by the empirical results.