Wealth inequality and financial development: Revisiting the symmetry breaking mechanism

• Main Author: ZHANG, Haiping
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2017
• Subjects: Financial frictions; Financial globalization; Minimum investment requirements; Symmetry breaking; Wealth inequality; Economic Theory
• Online Access: https://ink.library.smu.edu.sg/soe_research/2254
• Institution: Singapore Management University

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.