Wealth inequality and financial development: Revisiting the symmetry breaking mechanism

Publication Type

Journal Article

Publication Date

4-2017

Abstract

Matsuyama (Econometrica 72(3):853–884, 2004) shows that financial integration may lead to income polarization among inherently identical countries, if these countries are financially underdeveloped, a result he calls “symmetry breaking.” By introducing the minimum investment requirement and within-country wealth inequality into Matsuyama’s framework, I show that wealth inequality is as important as financial development in determining the possibility of symmetry breaking. I then address three practical issues in this model, e.g., the conditions of financial integration, the domestic financial crisis and capital controls, and the world interest rate changes and income volatility.

Keywords

Financial frictions, Financial globalization, Minimum investment requirements, Symmetry breaking, Wealth inequality

Discipline

Economic Theory

Research Areas

Economic Theory

Publication

Economic Theory

Volume

63

Issue

4

First Page

997

Last Page

1025

ISSN

0938-2259

Identifier

10.1007/s00199-016-0977-0

Publisher

Springer (part of Springer Nature): Springer Open Choice Hybrid Journals

Additional URL

https://doi.org/10.1007/s00199-016-0977-0

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