Financial Market Globalization, Growth, and Inequality of Nations: A Multicountry Case

ABSTRACT This paper proposes a world economy growth model where countries are plagued with domestic credit market imperfections, and there are knowledge spillovers diffusing from technologically advanced countries to backward ones. Under some conditions, globalizing financial markets beget uphill international credit flows which amplify all countries' initial income gaps, giving rise to a ranking of countries in terms of their living standards. The analysis shows that, while disconnecting from the world financial market helps a country to raise its income level, it impedes growth. A redistribution of total wage income from the highest‐income to the lowest‐income country narrows the income distances between countries, and it may speed up growth. The world economic growth rate increases with the number of countries participating in the international financial market.