Wealth inequality and financial development: revisiting the symmetry breaking mechanism

Haiping Zhang ()

Economic Theory, 2017, vol. 63, issue 4, No 7, 997-1025

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: E44 F41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s00199-016-0977-0

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