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The risk of financial crises: Is there a role for income inequality?

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  • Kirschenmann, Karolin
  • Malinen, Tuomas
  • Nyberg, Henri

Abstract

Could macroeconomic factors such as income inequality be the real root cause of financial crises? We explore a broad variety of financial and macroeconomic variables and employ a general-to-specific model selection process to find the most reliable predictors of financial crises in developed countries over a period of more than 100 years. Our in-sample results indicate that income inequality has predictive power beyond loan growth and several other financial variables. Out-of-sample forecasts for individual predictors show that their predictive power tends to vary considerably over time, but income inequality has predictive power in each forecasting period.

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  • Kirschenmann, Karolin & Malinen, Tuomas & Nyberg, Henri, 2016. "The risk of financial crises: Is there a role for income inequality?," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 161-180.
    • Handle: RePEc:eee:jimfin:v:68:y:2016:i:c:p:161-180
    DOI: 10.1016/j.jimonfin.2016.07.010
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    More about this item

    Keywords

    Early warning indicators; Bank loans; Income inequality; Fixed effects logit;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • G01 - Financial Economics - - General - - - Financial Crises

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