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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. Dean Corbae, 2007. "Politico-Economic Consequences of Rising Wage Inequality," 2007 Meeting Papers 129, Society for Economic Dynamics.
  2. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
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  6. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 569-587.
  7. Mark Aguiar & Manuel Amador, 2009. "Growth in the Shadow of Expropriation," Discussion Papers 08-051, Stanford Institute for Economic Policy Research.
  8. Ilzetzki, Ethan, 2006. "Rent seeing distortions and fiscal procyclicality," MPRA Paper 8726, University Library of Munich, Germany, revised 01 Dec 2007.
  9. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
  10. Zheng Song & Kjetil Storesletten & Fabrizio Zilibotti, 2007. "Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt," 2007 Meeting Papers 685, Society for Economic Dynamics.
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  12. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  13. 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.
  14. Azzimonti, Marina & de Francisco, Eva & Krusell, Per, 2008. "Production subsidies and redistribution," Journal of Economic Theory, Elsevier, vol. 142(1), pages 73-99, September.
  15. Emannauel Farhi & Ivan Werning, 2006. "Capital Taxation," 2006 Meeting Papers 455, Society for Economic Dynamics.
  16. Russell Cooper & Hubert Kempf & Dan Peled, 2005. "Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation," NBER Working Papers 11655, National Bureau of Economic Research, Inc.
  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. Fares Al-Hussami & Álvaro Martín Remesal, 2012. "Current Account Imbalances and Income Inequality: Theory and Evidence," Kiel Advanced Studies Working Papers 459, Kiel Institute for the World Economy.
  2. Perugini, Cristiano & Hölscher, Jens & Collie, Simon, 2013. "Inequality, credit expansion and financial crises," MPRA Paper 51336, University Library of Munich, Germany.
  3. Santo Milasi, 2012. "Top Income Shares and Budget Deficits," CEIS Research Paper 249, Tor Vergata University, CEIS, revised 08 Aug 2013.

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