Financial crises and inequality: New evidence from a panel of 17 advanced economies

What is the distributional consequence of a financial crisis? Does income inequality follow the boom-bust pattern that is typically associated with a financial crisis? Does the financial crisis primarily affect the wealthy and the recession mainly affect the rest of the population? Is the inequality impact of a financial crisis-induced recession different from that of a normal recession? They are important questions with policy implications which are little understood at present. Our paper fills this gap in the literature by carefully addressing these questions in a panel of 17 advanced economies for 1955–2016. Our results suggest that financial crises have statistically significant and long-lasting adverse effects on income distribution. So are the inequality effects of financial crisis-induced recessions in sharp contrast to those of normal recessions. The results are not driven by the 2008–2009 global financial crisis episode. Interestingly, the effects of financial crises (or financial recessions) systematically differ across the indicators of inequality and time horizons, shedding some light on channels linking financial crises and inequality. Careful robustness checks confirm our results.