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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.

Suggested Citation

  • Azzimonti, Marina & de Francisco, Eva & Quadrini, Vincenzo, 2012. "Financial Globalization, Inequality, and the Raising of Public Debt," CEPR Discussion Papers 8893, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8893
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    Cited by:

    1. Asongu, Simplice A & Nwachukwu, Jacinta C., 2016. "Unjust Enrichment from Official Corruption in Africa: Theory and Model on how Lenders have benefited," MPRA Paper 75416, University Library of Munich, Germany.
    2. Simplice A Asongu & Lieven De Moor, 2017. "Financial Globalisation Dynamic Thresholds for Financial Development: Evidence from Africa," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 29(1), pages 192-212, January.
    3. Simplice Asongu & Uchenna Efobi & Ibukun Beecroft, 2015. "Inclusive Human Development in Pre-crisis Times of Globalization-driven Debts," African Development Review, African Development Bank, vol. 27(4), pages 428-442, December.
    4. Simplice A. Asongu & Jacinta C. Nwachukwu, 2017. "The Comparative Inclusive Human Development of Globalisation in Africa," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 134(3), pages 1027-1050, December.
    5. Reinhart, Carmen M. & Reinhart, Vincent & Rogoff, Kenneth, 2015. "Dealing with debt," Journal of International Economics, Elsevier, vol. 96(S1), pages 43-55.
      • Carmen M. Reinhart & Vincent Reinhart & Kenneth Rogoff, 2014. "Dealing with Debt," NBER Chapters,in: NBER International Seminar on Macroeconomics 2014, pages 43-55 National Bureau of Economic Research, Inc.
    6. Röhrs, Sigrid & Winter, Christoph, 2017. "Reducing government debt in the presence of inequality," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 1-20.
    7. Perugini, Cristiano & Hölscher, Jens & Collie, Simon, 2013. "Inequality, credit expansion and financial crises," MPRA Paper 51336, University Library of Munich, Germany.
    8. Pablo D'Erasmo & Enrique G. Mendoza, 2016. "Distributional Incentives In An Equilibrium Model Of Domestic Sovereign Default," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 7-44, February.
    9. Carlos Bethencourt & Lars Kunze, 2015. "The political economics of redistribution, inequality and tax avoidance," Public Choice, Springer, vol. 163(3), pages 267-287, June.
    10. Röhrs, Sigrid & Winter, Christoph, 2015. "Public versus private provision of liquidity: Is there a trade-off?," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 314-339.
    11. Santo Milasi, 2014. "Top Income Shares and Budget Deficits," Rivista di Politica Economica, SIPI Spa, issue 1, pages 383-406, January-M.
    12. Pablo D'Erasmo & Enrique G. Mendoza, 2016. "Optimal Domestic (and External) Sovereign Default," NBER Working Papers 22509, National Bureau of Economic Research, Inc.
    13. Vincenzo Quadrini, 2017. "The external risks of financial integration for emerging economies," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 35(82), pages 18-24, April.
    14. Luca Agnello & Ricardo M. Sousa, 2014. "The Determinants of the Volatility of Fiscal Policy Discretion," Fiscal Studies, Institute for Fiscal Studies, vol. 35, pages 91-115, March.
    15. Adam Koronowski, 2016. "Technological Progress and Unemployment: Luddism and Beyond," Gospodarka Narodowa, Warsaw School of Economics, issue 4, pages 5-22.
    16. Bouton, Laurent & Lizzeri, Alessandro & Persico, Nicola, 2016. "The Political Economy of Debt and Entitlements," CEPR Discussion Papers 11459, C.E.P.R. Discussion Papers.
    17. Al-Hussami, Fares & Remesal, Álvaro Martín, 2012. "Current account imbalances and income inequality: Theory and evidence," Kiel Advanced Studies Working Papers 459, Kiel Institute for the World Economy (IfW).
    18. Yasunori Fujita, 2016. "A new look at fiscal sustainability: an attempt to reveal the relationship between the sustainability of external debt and the inequality," Economics and Business Letters, Oviedo University Press, vol. 4(4), pages 161-165.
    19. Md. Rabiul Islam & Jakob Brochner Madsen & Hristos Doucouliagos, 2016. "Does Inequality Constrain the Power to Tax? Evidence from the OECD," Monash Economics Working Papers 29-16, Monash University, Department of Economics.
    20. Vincenzo Quadrini, 2017. "The external risks of financial integration for emerging economies," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 35(82), pages 16-30, April.
    21. Matthew Holloway & Jari Eloranta, 2014. "“Stability breeds instability?” A Minskian analysis of the crisis of the Asian Tigers in the 1990s," Investigaciones de Historia Económica (IHE) Journal of the Spanish Economic History Association, Asociacion Espa–ola de Historia Economica, vol. 10(02), pages 115-126.
    22. repec:bla:reviec:v:25:y:2017:i:5:p:1155-1173 is not listed on IDEAS
    23. Chatzouz, Moustafa, 2014. "Government Debt and Wealth Inequality: Theory and Insights from Altruism," MPRA Paper 77007, University Library of Munich, Germany.
    24. Ryo Arawatari & Tetsuo Ono, 2017. "Inequality and public debt: A positive analysis," Review of International Economics, Wiley Blackwell, vol. 25(5), pages 1155-1173, November.

    More about this item

    Keywords

    Financial integration; Government debt; Income inequality;

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other

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