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Financial Development and Inequality in the Global Economy

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  • Maximilian von Ehrlich
  • Tobias Seidel

Abstract

We build a heterogeneous-firms model with firm-specific wages and credit frictions to study the role of financial development for inequality in the global economy. If there are many small firms, better access to external funds reduces wage inequality and unemployment. In contrast, if there are many highproductive firms (those that export), financial development may have opposite effects - especially if trade costs are low. In sum, the implications of financial development for inequality depend on the size distribution of firms and on the costs of exporting. Trade liberalization, however, raises inequality unambiguously.

Suggested Citation

  • Maximilian von Ehrlich & Tobias Seidel, 2016. "Financial Development and Inequality in the Global Economy," CESifo Working Paper Series 5776, CESifo.
    • Handle: RePEc:ces:ceswps:_5776
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    More about this item

    Keywords

    financial development; credit constraints; international trade; inequality;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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