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Does inequality lead to a financial crisis?

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  • Bordo, Michael D.
  • Meissner, Christopher M.

Abstract

The recent global crisis has sparked interest in the relationship between income inequality, credit booms, and financial crises. Rajan (2010) and Kumhof and Rancière (2011) propose that rising inequality led to a credit boom and eventually to a financial crisis in the US in the first decade of the 21st century as it did in the 1920s. Data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships. Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 31 (2012)
Issue (Month): 8 ()
Pages: 2147-2161

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Handle: RePEc:eee:jimfin:v:31:y:2012:i:8:p:2147-2161

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Top incomes; Income inequality; Redistribution; Credit booms; Financial crises; Financial de-regulation;

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  1. Romain Ranciere & Michael Kumhof, 2011. "Inequality, Leverage and Crises," 2011 Meeting Papers 1374, Society for Economic Dynamics.
  2. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-61, April.
  3. James Lothian, 2011. "Why Money Matters: A Fourth Natural Experiment," Open Economies Review, Springer, vol. 22(2), pages 179-187, April.
  4. Wojciech Kopczuk & Emmanuel Saez & Jae Song, 2010. "Earnings Inequality and Mobility in the United States: Evidence from Social Security Data since 1937," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(1), pages 91-128, February.
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  7. Enrique G. Mendoza & Marco E. Terrones, 2008. "An Anatomy Of Credit Booms: Evidence From Macro Aggregates And Micro Data," NBER Working Papers 14049, National Bureau of Economic Research, Inc.
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  14. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 16(32), pages 51-82, 04.
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  16. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-64, Summer.
  17. Martha L. Olney, 1999. "Avoiding Default: The Role Of Credit In The Consumption Collapse Of 1930," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(1), pages 319-335, February.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Inequality and the crisis: problems of reversed causality
    by Vuk Vukovic in Don't worry, I'm an economist on 2012-07-03 18:59:00
  2. Verursacht Ungleichheit Finanzkrisen? Aktuelles zur Verteilungsökonomik (2)
    by faz-gb in Fazit on 2013-02-28 12:42:25
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