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Does Inequality Lead to a Financial Crisis?

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  • Michael D. Bordo
  • Christopher M. Meissner

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17896.

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Date of creation: Mar 2012
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Handle: RePEc:nbr:nberwo:17896

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Citations

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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Cited by:
  1. Gabriel Jiménez & Steven Ongena & José-Luis Peydró & Jesús Saurina, 2012. "Macroprudential policy, countercyclical bank capital buffers and credit supply: Evidence from the Spanish dynamic provisioning experiments," Economics Working Papers 1315, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2013.
  2. José-Luis Peydró, 2012. "Comment on "Risk Heterogeneity and Credit Supply: Evidence from the Mortgage Market"," NBER Chapters, in: NBER Macroeconomics Annual 2012, Volume 27 National Bureau of Economic Research, Inc.
  3. Till van Treeck, 2012. "Did inequality cause the U.S. financial crisis?," IMK Working Paper 91-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  4. Feldkircher, Martin, 2012. "The Determinants of Vulnerability to the Global Financial Crisis 2008 to 2009: Credit Growth and Other Sources of Risk," BOFIT Discussion Papers 26/2012, Bank of Finland, Institute for Economies in Transition.

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