Financial Development and Inequality in the Global Economy

34 Pages Posted: 23 Mar 2016

See all articles by Maximilian von Ehrlich

Maximilian von Ehrlich

Ludwig Maximilian University of Munich (LMU) - Center for Economic Studies (CES)

Tobias Seidel

University of Duisburg-Essen - Mercator School of Management

Date Written: February 29, 2016

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 firms, better access to external funds reduces wage inequality and unemployment. In contrast, if there are many highproductive firms (those that export), financial development may have opposite effects - especially if trade costs are low. In sum, 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.

Keywords: financial development, credit constraints, international trade, inequality

JEL Classification: F160, F650

Suggested Citation

von Ehrlich, Maximilian and Seidel, Tobias, Financial Development and Inequality in the Global Economy (February 29, 2016). CESifo Working Paper Series No. 5776. Available at SSRN: https://ssrn.com/abstract=2753486

Maximilian Von Ehrlich

Ludwig Maximilian University of Munich (LMU) - Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, 80539
Germany

Tobias Seidel (Contact Author)

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstra├če 65
Duisburg, Nordrhein-Westfalen 47057
Germany

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