Financial Globalization, Inequality, and the Raising of Public Debt

During the same period, the authors also observe a significant liberalization of international financial markets and an increase in income inequality in several industrialized countries. In this paper they 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. The authors also conduct an empirical analysis using OECD data and find that the predictions of the theoretical model are supported by the empirical results.