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Financial globalization, inequality, and the raising of public debt

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  • Marina Azzimonti
  • Eva de Francisco
  • Vincenzo Quadrini

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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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 12-6.

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Date of creation: 2012
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Handle: RePEc:fip:fedpwp:12-6

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Keywords: Debts; Public;

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  1. Song, Zheng & Storesletten, Kjetil & Zilibotti, Fabrizio, 2007. "Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt," Memorandum, Oslo University, Department of Economics 05/2008, Oslo University, Department of Economics.
  2. Dean Corbae, 2007. "Politico-Economic Consequences of Rising Wage Inequality," 2007 Meeting Papers, Society for Economic Dynamics 129, Society for Economic Dynamics.
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  6. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  7. 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.
  8. Ilzetzki, Ethan, 2011. "Rent-seeking distortions and fiscal procyclicality," Journal of Development Economics, Elsevier, Elsevier, vol. 96(1), pages 30-46, September.
  9. Caballero, Ricardo J. & Yared, Pierre, 2010. "Future rent-seeking and current public savings," Journal of International Economics, Elsevier, Elsevier, vol. 82(2), pages 124-136, November.
  10. Mikhail Golosov & Narayana R. Kocherlakota & Aleh Tsyvinski, 2001. "Optimal indirect and capital taxation," Working Papers, Federal Reserve Bank of Minneapolis 615, Federal Reserve Bank of Minneapolis.
  11. 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, Federal Reserve Bank of Dallas 0507, Federal Reserve Bank of Dallas.
  12. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "From Financial Crash to Debt Crisis," NBER Working Papers 15795, National Bureau of Economic Research, Inc.
  13. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  14. Azzimonti, Marina & de Francisco, Eva & Krusell, Per, 2008. "Production subsidies and redistribution," Journal of Economic Theory, Elsevier, Elsevier, vol. 142(1), pages 73-99, September.
  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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 119-142, February.
  16. George M von Furstenberg, 2005. "Global Capital Markets, Integration, Crisis and Growth," Comparative Economic Studies, Palgrave Macmillan, 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, Kiel Institute for the World Economy 459, Kiel Institute for the World Economy.
  2. Santo Milasi, 2012. "Top Income Shares and Budget Deficits," CEIS Research Paper, Tor Vergata University, CEIS 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.

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