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The Circular Relationship Between Inequality, Leverage, And Financial Crises

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  • Rémi Bazillier
  • Jérôme Hericourt

Abstract

In this paper, we put into perspective the recent literature which points to inequality as a possible cause of credit bubbles, by reintegrating it into a more general analysis on the two-way relationship between inequality and finance. We focus more specifically on situations where high inequalities and widespread access to credit coexist, and argue that, even when institutions maintain more or less equal access to finance, there may be a dynamic, positive circular relationship between inequality and financial development. However, if we find robust evidence in the literature of a positive causal impact of inequality on credit, the conclusions concerning the distributional impact of financial development, financial deregulation, and financial crises become less clear. A survey of the empirical literature highlights several issues that must be tackled. First, endogeneity: reverse causality and coincidental factors are major concerns. Second, the choice of consistent measurements for the key variables (both credit and inequality) has strong empirical implications, and must be grounded on relevant theoretical channels. Third, those circular dynamics have substantial policy implications for emerging countries, since an increasing number face a joint increase in inequality and credit.
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  • Rémi Bazillier & Jérôme Hericourt, 2017. "The Circular Relationship Between Inequality, Leverage, And Financial Crises," Journal of Economic Surveys, Wiley Blackwell, vol. 31(2), pages 463-496, April.
  • Handle: RePEc:bla:jecsur:v:31:y:2017:i:2:p:463-496
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    Cited by:

    1. Remi Bazillier & Boris Najman, 2017. "Labour and Financial Crises: Is Labour Paying the Price of the Crisis?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(1), pages 55-76, March.
    2. Rémi Bazillier & Jérôme Héricourt & Samuel Ligonnière, 2017. "Structure of Income Inequality and Household Leverage: Theory and Cross-Country Evidence," Working Papers 2017-01, CEPII research center.
    3. Iwata, Kazumasa & Jean, Sébastien & Kastrop, Christian & Loewald, Chris & Véron, Nicolas, 2017. "T20 resilience and inclusive growth," Economics Discussion Papers 2017-94, Kiel Institute for the World Economy (IfW).
    4. Pierre Monnin, 2017. "Monetary Policy, Macroprudential Regulation and Inequality," Discussion Notes 1702, Council on Economic Policies.

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