Working Paper: CEPR ID: DP8893
Authors: Marina Azzimonti; Eva De Francisco; Vincenzo Quadrini
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.
Keywords: financial integration; government debt; income inequality
JEL Codes: E60; F59
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial Integration (F30) | Increased Government Borrowing (H74) |
| Lower Elasticity of Interest Rates with Respect to Debt Supply (E43) | Increased Government Borrowing (H74) |
| Rising Income Inequality (D31) | Increased Demand for Public Debt (H69) |
| Increased Demand for Public Debt (H69) | Higher Public Debt Issuance (H63) |
| Rising Income Inequality in a Subset of Countries (D31) | Increased Global Public Debt (F65) |