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Inequality, Leverage and Crises

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  • Romain Ranciere
  • Michael Kumhof

Abstract

The paper studies how high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and an eventual financial and real crisis. The paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes. A financial crisis can reduce leverage if it is very large and not accompanied by a real contraction. But restoration of the lower income group''s bargaining power is more effective.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/268.

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Length: 37
Date of creation: 01 Nov 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/268

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Keywords: Income distribution; Borrowing; Economic models; Financial risk; Financial sector; Household credit; income inequality; probability; consumption inequality; calibration; survey; consumption levels; standard deviation; level of consumption; capital accumulation; non-durable consumption; distribution of income; real interest rate; probability function; disposable income; labor income; probabilities; lifetime income; nonlinear model; capital account; consumption risk; statistics; general equilibrium model; horizontal axis; stochastic process; sensitivity analysis; calibrations; consumption increases; numerical integration; predictions; perturbation; equation; price deflator; investment demand; capital income; equations; consumption expenditures; simulation results; logarithm;

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References

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  1. Wojciech Kopczuk, 2006. "Bequest and Tax Planning: Evidence From Estate Tax Returns," NBER Working Papers 12701, National Bureau of Economic Research, Inc.
  2. Davig, Troy & Leeper, Eric M. & Walker, Todd B., 2010. ""Unfunded liabilities" and uncertain fiscal financing," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 600-619, July.
  3. Troy Davig & Eric M. Leeper, 2005. "Generalizing the Taylor Principle," NBER Working Papers 11874, National Bureau of Economic Research, Inc.
  4. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
  5. Romain Ranciere & Aaron Tornell & Frank Westermann, 2005. "Systemic Crises and Growth," NBER Working Papers 11076, National Bureau of Economic Research, Inc.
  6. Juillard, Michel & Laxton, Douglas & McAdam, Peter & Pioro, Hope, 1998. "An algorithm competition: First-order iterations versus Newton-based techniques," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1291-1318, August.
  7. Heathcote, Jonathan & Perri, Fabrizio & Violante, Giovanni L, 2009. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967-2006," CEPR Discussion Papers 7538, C.E.P.R. Discussion Papers.
  8. 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, vol. 125(1), pages 91-128, February.
  9. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316 National Bureau of Economic Research, Inc.
  10. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Doit-on craindre la hausse des inégalités ?
    by david.marguerit@gmail.com (David Marguerit) in BS Initiative on 2013-12-03 13:44:04
  2. Inequality & the crisis
    by chris dillow in Stumbling and Mumbling on 2012-03-08 12:52:12
  3. Quels liens entre inégalités, redistribution et croissance ?
    by ? in D'un champ l'autre on 2014-02-28 15:05:00
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