Inequality, Leverage, and Crises
- (pp. 1217-45)
(Complimentary)
Abstract
The paper studies how high household leverage and crises can be caused by changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of high-income households, a large increase in debt leverage of low- and middle-income households, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises are the endogenous result of a growing income share of high-income households. The model matches the profiles of the income distribution, the debt-to-income ratio and crisis risk for the three decades preceding the Great Recession. (JEL D14, D31, D33, E32, E44, G01, N22)Citation
Kumhof, Michael, Romain Rancière, and Pablo Winant. 2015. "Inequality, Leverage, and Crises." American Economic Review, 105 (3): 1217-45. DOI: 10.1257/aer.20110683Additional Materials
JEL Classification
- D14 Household Saving; Personal Finance
- D31 Personal Income, Wealth, and Their Distributions
- D33 Factor Income Distribution
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises
- N22 Economic History: Financial Markets and Institutions: U.S.; Canada: 1913-