Econometrica: May, 2004, Volume 72, Issue 3

Financial Market Globalization, Symmetry‐Breaking, and Endogenous Inequality of Nations

https://doi.org/10.1111/j.1468-0262.2004.00514.x
p. 853-884

Kiminori Matsuyama

This paper investigates the effects of financial market globalization on the inequality of nations. The world economy consists of inherently identical countries, which differ only in their levels of capital stock. Each country is represented by the standard overlapping generations model, modified only to incorporate credit market imperfection. An integration of financial markets affects the set of stable steady states, as it changes the balance between the equalizing force of the diminishing returns technology and the unequalizing force of the wealth‐dependent borrowing constraint. The model is tractable enough to allow for a complete characterization of the stable steady states.