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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.

Suggested Citation

  • 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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    Cited by:

    1. Antunes, António & Bonfim, Diana & Monteiro, Nuno & Rodrigues, Paulo M.M., 2018. "Forecasting banking crises with dynamic panel probit models," International Journal of Forecasting, Elsevier, vol. 34(2), pages 249-275.
    2. Mathias Klein & Roland Winkler, 2017. "Austerity, Inequality, and Private Debt Overhang," Discussion Papers of DIW Berlin 1633, DIW Berlin, German Institute for Economic Research.
    3. Paul, Pascal, 2017. "Historical Patterns of Inequality and Productivity around Financial Crises," Working Paper Series 2017-23, Federal Reserve Bank of San Francisco.
    4. repec:kap:jecinq:v:16:y:2018:i:2:d:10.1007_s10888-018-9387-9 is not listed on IDEAS
    5. Andrea Colciago & Anna Samarina & Jakob de Haan, 2018. "Central bank policies and income and wealth inequality: A survey," DNB Working Papers 594, Netherlands Central Bank, Research Department.
    6. Pascal Paul, 2018. "Historical Patterns of Inequality and Productivity around Financial Crises," 2018 Meeting Papers 583, Society for Economic Dynamics.
    7. 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.

    More about this item

    Keywords

    Early warning indicators; Bank loans; Income inequality; Fixed effects logit;

    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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