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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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    References listed on IDEAS

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    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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