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Wealth inequality and financial development: revisiting the symmetry breaking mechanism

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  • Haiping Zhang

    (School of Economics, Singapore Management University)

Abstract

Matsuyama (Econometrica 72(3):853–884, 2004) shows that financial integration may lead to income polarization among inherently identical countries, if these countries are financially underdeveloped, a result he calls “symmetry breaking.” By introducing the minimum investment requirement and within-country wealth inequality into Matsuyama’s framework, I show that wealth inequality is as important as financial development in determining the possibility of symmetry breaking. I then address three practical issues in this model, e.g., the conditions of financial integration, the domestic financial crisis and capital controls, and the world interest rate changes and income volatility.

Suggested Citation

  • Haiping Zhang, 2017. "Wealth inequality and financial development: revisiting the symmetry breaking mechanism," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(4), pages 997-1025, April.
    • Handle: RePEc:spr:joecth:v:63:y:2017:i:4:d:10.1007_s00199-016-0977-0
    DOI: 10.1007/s00199-016-0977-0
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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