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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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Related research

Keywords: Income distribution; Borrowing; Economic models; Financial risk; Financial sector; Household credit;

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References

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  1. Troy Davig & Eric M. Leeper, 2007. "Generalizing the Taylor Principle," American Economic Review, American Economic Association, vol. 97(3), pages 607-635, June.
  2. Wojciech Kopczuk, 2007. "Bequest and Tax Planning: Evidence from Estate Tax Returns," The Quarterly Journal of Economics, MIT Press, vol. 122(4), pages 1801-1854, November.
  3. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2009. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967-2006," NBER Working Papers 15483, 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. 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.
  6. Troy Davig & Eric M. Leeper, 2005. "Fluctuating Macro Policies and the Fiscal Theory," NBER Working Papers 11212, National Bureau of Economic Research, Inc.
  7. 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.
  8. Romain Ranciere & Aaron Tornell & Frank Westermann, 2002. "Systemic Crises and Growth," Working Papers 190, Barcelona Graduate School of Economics.
  9. Troy Davig & Eric M. Leeper & Todd B. Walker, 2010. ""Unfunded liabilities" and uncertain fiscal financing," Research Working Paper RWP 10-09, Federal Reserve Bank of Kansas City.
  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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Citations

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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