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Did inequality cause the U.S. financial crisis?

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  • Till van Treeck

    ()
    (IMK at the Hans Boeckler Foundation)

Abstract

In his widely discussed book "Fault Lines" (2010), Raghuram Rajan argues that many U.S. consumers have reacted to the decline in their relative permanent incomes since the early 1980s by reducing saving and increasing debt. This has temporarily kept private consumption and thus aggregate demand and employment high, despite stagnating incomes for many households. But it also contributed to the creation of a credit bubble, which eventually burst, and a large current account deficit in the United States. We place the Rajan hypothesis in the context of competing theories of consumption, and survey the empirical literature on the effects of inequality on household behaviour beyond the largely anecdotal evidence provided in Rajan (2010). We argue that the Rajan hypothesis, supported by the empirical evidence, calls for a renaissance of the relative income hypothesis of consumption.

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Bibliographic Info

Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 91-2012.

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Length: 39 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:imk:wpaper:91-2012

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Keywords: Great Recession; income inequality; household dept; consumpion theory;

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Citations

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Cited by:
  1. Jakob Kapeller & Bernhard Schütz, 2012. "Debt, Boom, Bust: A Theory of Minsky-Veblen Cycles," Economics working papers 2012-14, Department of Economics, Johannes Kepler University Linz, Austria.
  2. Thomas I. Palley, 2013. "Gattopardo economics: the crisis and the mainstream response of change that keeps things the same," European Journal of Economics and Economic Policies: Intervention, Edward Elgar, vol. 10(2), pages 193-206.
  3. Thomas Goda, 2013. "The role of income inequality in crisis theories and in the subprime crisis," Working Papers PKWP1305, Post Keynesian Economics Study Group (PKSG).
  4. Jakob Kapeller & Bernhard Schütz, 2012. "Conspicuous consumption, inequality and debt: The nature of consumption-driven profit-led regimes," Economics working papers 2012-13, Department of Economics, Johannes Kepler University Linz, Austria.
  5. Greg Hannsgen & Dimitri B. Papadimitriou, 2012. "Fiscal Traps and Macro Policy after the Eurozone Crisis," Economics Public Policy Brief Archive ppb_127, Levy Economics Institute.
  6. Jakob Kapeller & Bernhard Schütz, 2013. "Exploring Pluralist Economics: The Case of the Minsky-Veblen Cycles," Journal of Economic Issues, M.E. Sharpe, Inc., vol. 47(2), pages 515-524, June.

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