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Financial Globalization, Inequality, and the Rising Public Debt

Author

Listed:
  • Marina Azzimonti
  • Eva de Francisco
  • Vincenzo Quadrini

Abstract

During the last three decades government debt has increased in most developed countries. During the same period we have also observed a significant liberalization of international financial markets. We propose a multi-country model with incomplete markets and show that governments may choose higher levels of debt when financial markets become internationally integrated. We also show that public debt increases with the volatility of uninsurable income (idiosyncratic risk). To the extent that the increase in income inequality observed in some industrialized countries has been associated with higher idiosyncratic risk, the paper suggests another potential mechanism for the rise in public debt.

Suggested Citation

  • Marina Azzimonti & Eva de Francisco & Vincenzo Quadrini, 2014. "Financial Globalization, Inequality, and the Rising Public Debt," American Economic Review, American Economic Association, vol. 104(8), pages 2267-2302, August.
  • Handle: RePEc:aea:aecrev:v:104:y:2014:i:8:p:2267-2302
    Note: DOI: 10.1257/aer.104.8.2267
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    References listed on IDEAS

    as
    1. Obstfeld,Maurice & Taylor,Alan M., 2005. "Global Capital Markets," Cambridge Books, Cambridge University Press, number 9780521671798, March.
    2. Ruediger Bachmann & Jinhui Bai, 2013. "Politico-Economic Inequality and the Comovement of Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 565-580, October.
    3. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 3-71, March.
    4. 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.
    5. Broner, Fernando A. & Gaston Gelos, R. & Reinhart, Carmen M., 2006. "When in peril, retrench: Testing the portfolio channel of contagion," Journal of International Economics, Elsevier, vol. 69(1), pages 203-230, June.
    6. Ruediger Bachmann & Jinhui Bai, 2013. "Politico-Economic Inequality and the Comovement of Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 565-580, October.
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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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