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Income inequality and financial crises: evidence from the bootstrap rolling window

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  • Mehmet Akif Destek

    (Gaziantep University)

  • Bilge Koksel

    (Gaziantep University)

Abstract

This study aims to investigate the validity of the Rajan hypothesis, which argues that increasing income inequality plays a key role in the outbreak of financial crises. The relationship between income inequality and credit booms are examined in 10 developed countries: Australia, Canada, Denmark, Finland, France, the United Kingdom, Japan, Norway, Sweden, and the United States. In doing so, a bootstrap rolling-window estimation procedure is used to detect any possible causal link between inequality and credit booms in financial crisis sub-periods. The results reveal that the Rajan hypothesis is supported for the 1989 crisis in Australia, the 1991 and 2007 crises in the United Kingdom, and the 1929 and 2007 crises in the United States. Therefore, increasing income inequality has positive predictive power on credit booms in Anglo-Saxon countries. However, the hypothesis is not confirmed for Scandinavian and continental European countries. Our study is novel in its use of the bootstrap rolling-window procedure, which allows us to detect the possible relationship between inequality and credit booms in financial crises. The findings suggest that a progressive taxation policy or investments to accumulate human capital and increase the labor force are more beneficial than temporary solutions.

Suggested Citation

  • Mehmet Akif Destek & Bilge Koksel, 2019. "Income inequality and financial crises: evidence from the bootstrap rolling window," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-23, December.
    • Handle: RePEc:spr:fininn:v:5:y:2019:i:1:d:10.1186_s40854-019-0136-2
    DOI: 10.1186/s40854-019-0136-2
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    Cited by:

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    4. Gaies, Brahim, 2024. "In search of lost social finance: How do financial instability and inequality interact?," Research in International Business and Finance, Elsevier, vol. 72(PA).
    5. Bodea, Cristina & Houle, Christian & Kim, Hyunwoo, 2021. "Do financial crises increase income inequality?," World Development, Elsevier, vol. 147(C).

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    More about this item

    Keywords

    E25; E51; G01;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G01 - Financial Economics - - General - - - Financial Crises

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