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Financial Development and Inequality in the Global Economy

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  • Maximilian v. Ehrlich
  • Tobias Seidel

Abstract

We build a heterogeneous firms model with firm‐specific wages and credit frictions to study the role of financial development for inequality in the global economy. If there are many small (non‐exporting) firms, better access to external funds reduces wage and profit inequality as well as unemployment. In contrast, if there are many large (exporting) firms, financial development might have opposite effects – especially if trade costs are low. In summary, the implications of financial development for inequality depend on the size distribution of firms and on the costs of exporting. Trade liberalization, however, raises inequality unambiguously.

Suggested Citation

  • Maximilian v. Ehrlich & Tobias Seidel, 2019. "Financial Development and Inequality in the Global Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(4), pages 1533-1560, October.
    • Handle: RePEc:bla:scandj:v:121:y:2019:i:4:p:1533-1560
    DOI: 10.1111/sjoe.12312
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    3. Roya Taherifar & Mark J. Holmes & Gazi M. Hassan, 2023. "Does economic openness matter in the impact of financial development on income inequality?," Working Papers in Economics 23/04, University of Waikato.
    4. Sethi, Pradeepta & Bhattacharjee, Sankalpa & Chakrabarti, Debkumar & Tiwari, Chhavi, 2021. "The impact of globalization and financial development on India’s income inequality," Journal of Policy Modeling, Elsevier, vol. 43(3), pages 639-656.

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    More about this item

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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