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Inequality, Leverage and Crises

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  • Romain Ranciere

    (PSE and IMF)

  • Michael Kumhof

    (IMF)

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 1983-2007 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 groupâs bargaining power is more effective.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1374.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1374

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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References

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  1. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
  2. Romain Ranciere & Aaron Tornell & Frank Westermann, 2005. "Systemic Crises and Growth," NBER Working Papers 11076, National Bureau of Economic Research, Inc.
  3. 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.
  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, vol. 125(1), pages 91-128, February.
  5. Troy Davig & Eric M. Leeper, 2006. "Generalizing the Taylor Principle," Caepr Working Papers 2006-001, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  6. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Inequality & the crisis
    by chris dillow in Stumbling and Mumbling on 2012-03-08 12:52:12
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Cited by:
  1. Charpe, Matthieu & Kühn, Stefan, 2012. "Bargaining, Aggregate Demand and Employment," MPRA Paper 40189, University Library of Munich, Germany.
  2. Spencer, Thomas & Lucas, Chancel & Emmanuel, Guerin, 2012. "Exiting the crisis in the right direction: A sustainable and shared prosperity plan for Europe," MPRA Paper 38802, University Library of Munich, Germany.
  3. Landier, Augustin & Plantin, Guillaume, 2011. "Inequality, tax avoidance and financial instability," TSE Working Papers 11-282, Toulouse School of Economics (TSE).
  4. Giovanni Dosi & Giorgio Fagiolo & Mauro Napoletano & Andrea Roventini, 2012. "Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model," Documents de Travail de l'OFCE 2012-06, Observatoire Francais des Conjonctures Economiques (OFCE).
  5. Jan Vandemoortele, 2012. "Equity Begins with Children," Working papers 1201, UNICEF,Division of Policy and Strategy.
  6. Luca Agnello & Ricardo M. Sousa, 2011. "How do Banking Crises Impact on Income Inequality?," NIPE Working Papers 30/2011, NIPE - Universidade do Minho.
  7. 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.
  8. Reuben Soto, Sergio, 2012. "Fundamentos hipotéticos para proyectos de investigación sobre la crisis económica contemporánea
    [Hypothetical foundations for research projects on the contemporary economic crisis]    ," MPRA Paper 39591, University Library of Munich, Germany.
  9. José María, Larrú, 2012. "La relación entre la ayuda al desarrollo y la desigualdad. Evidencia y justificación teórica
    [Aid and inequality relationship. Evidence and theoretical justification]    ," MPRA Paper 38857, University Library of Munich, Germany.
  10. Philipp Poppitz, 2011. "The Collective Risk of Inequality: a Social Dilemma calling for a Solution?," Macroeconomics and Finance Series 201106, Hamburg University, Department Wirtschaft und Politik.

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