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Financial Globalization, Inequality, and the Raising of Public Debt

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  • Azzimonti, Marina
  • de Francisco, Eva
  • Quadrini, Vincenzo

Abstract

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8893.

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Date of creation: Sep 2012
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Handle: RePEc:cpr:ceprdp:8893

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Keywords: Financial integration; Government debt; Income inequality;

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References

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  1. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2001. "Optimal indirect and capital taxation," Staff Report, Federal Reserve Bank of Minneapolis 293, Federal Reserve Bank of Minneapolis.
  2. Caballero, Ricardo J & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2006. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt7xc0g8mm, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. Zheng Song, 2009. "Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt," 2009 Meeting Papers, Society for Economic Dynamics 94, Society for Economic Dynamics.
  4. Ilzetzki, Ethan, 2006. "Rent seeing distortions and fiscal procyclicality," MPRA Paper 8726, University Library of Munich, Germany, revised 01 Dec 2007.
  5. Dean Corbae, 2007. "Politico-Economic Consequences of Rising Wage Inequality," 2007 Meeting Papers, Society for Economic Dynamics 129, Society for Economic Dynamics.
  6. Russell Cooper & Hubert Kempf & Dan Peled, 2005. "Is it is or is it ain't my obligation? Regional debt in a fiscal federation," Working Papers 0507, Federal Reserve Bank of Dallas.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
  8. Emannauel Farhi & Ivan Werning, 2006. "Capital Taxation," 2006 Meeting Papers, Society for Economic Dynamics 455, Society for Economic Dynamics.
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  10. Albanesi, Stefania & Sleet, Christopher, 2003. "Dynamic Optimal Taxation with Private Information," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4006, C.E.P.R. Discussion Papers.
  11. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  12. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
  13. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  14. Ricardo J. Caballero & Pierre Yared, 2008. "Future Rent-Seeking and Current Public Savings," NBER Working Papers 14417, National Bureau of Economic Research, Inc.
  15. Russell Cooper & Hubert Kempf, 2003. "Commitment and the Adoption of a Common Currency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 119-142, February.
  16. Azzimonti, Marina & de Francisco, Eva & Krusell, Per, 2008. "Production subsidies and redistribution," Journal of Economic Theory, Elsevier, vol. 142(1), pages 73-99, September.
  17. George M von Furstenberg, 2005. "Global Capital Markets, Integration, Crisis and Growth," Comparative Economic Studies, Palgrave Macmillan, vol. 47(3), pages 591-593, September.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Increasing public debt is a consequence of financial liberalization and inequality
    by Economic Logician in Economic Logic on 2012-03-28 14:14:00
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Cited by:
  1. Christoph Winter & Sigrid Roehrs, 2014. "Reducing Government Debt in the Presence of Inequality," 2014 Meeting Papers, Society for Economic Dynamics 176, Society for Economic Dynamics.
  2. Santo Milasi, 2012. "Top Income Shares and Budget Deficits," CEIS Research Paper 249, Tor Vergata University, CEIS, revised 08 Aug 2013.
  3. Perugini, Cristiano & Hölscher, Jens & Collie, Simon, 2013. "Inequality, credit expansion and financial crises," MPRA Paper 51336, University Library of Munich, Germany.
  4. Fares Al-Hussami & Álvaro Martín Remesal, 2012. "Current Account Imbalances and Income Inequality: Theory and Evidence," Kiel Advanced Studies Working Papers, Kiel Institute for the World Economy 459, Kiel Institute for the World Economy.

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