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Does the inequality-credit-crisis nexus exist? An empirical re-examination

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  • Xiao Chang
  • Guoqiang Li
  • Xinhua Gu
  • Chunyu Lei

Abstract

Rajan claims that rising inequality led to financial crises through credit booms in the U.S. Kumhof and Ranciere provide a theoretical formulation for this hypothesis. However, their assertions are not supported by cross-country evidence found in the work of Bordo and Meissner. A few subsequent empirical studies, albeit inspired by this pioneering work, find new evidence not in line with its conclusion but with the Rajan hypothesis. To clarify this controversial issue, we base our study on the B-M framework, resort to different estimators, and employ more model specifications by incorporating the role of deindustrialization. We find strong evidence for the inequality-credit-crisis nexus as modelled by Kumhof et al.

Suggested Citation

  • Xiao Chang & Guoqiang Li & Xinhua Gu & Chunyu Lei, 2020. "Does the inequality-credit-crisis nexus exist? An empirical re-examination," Applied Economics, Taylor & Francis Journals, vol. 52(37), pages 4044-4057, July.
    • Handle: RePEc:taf:applec:v:52:y:2020:i:37:p:4044-4057
    DOI: 10.1080/00036846.2020.1730757
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    Cited by:

    1. Fierro, Luca Eduardo & Giri, Federico & Russo, Alberto, 2023. "Inequality-constrained monetary policy in a financialized economy," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 366-385.
    2. Sheunesu Zhou & Olivier Niyitegeka, 2023. "On the Dynamic Relationship between Household Debt and Income Inequality in South Africa," JRFM, MDPI, vol. 16(10), pages 1-17, September.
    3. Rym Ayadi & Sami B. Naceur & Sandra Challita, 2023. "Does income inequality really matter for credit booms?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 52(1), February.

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