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Inequality, Leverage, and Crises

Listed author(s):
  • Michael Kumhof
  • Romain Rancière
  • Pablo Winant

The paper studies how high household leverage and crises can be caused by changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of high-income households, a large increase in debt leverage of low- and middle-income households, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises are the endogenous result of a growing income share of high-income households. The model matches the profiles of the income distribution, the debt-to-income ratio and crisis risk for the three decades preceding the Great Recession. (JEL D14, D31, D33, E32, E44, G01, N22)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 105 (2015)
Issue (Month): 3 (March)
Pages: 1217-1245

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Handle: RePEc:aea:aecrev:v:105:y:2015:i:3:p:1217-45
Note: DOI: 10.1257/aer.20110683
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