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Financial globalization, inequality, and the raising of public debt

  • Marina Azzimonti-Renzo
  • Eva de Francisco
  • Vincenzo Quadrini

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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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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