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An investigation of the effects of income inequality on financial fragility: Evidence from Organization for Economic Co‐operation and Development countries

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  • Chrysovalantis Amountzias

Abstract

The main scope of the paper is to investigate the proposition that rising income inequality results in systemic financial instability in developed countries. In particular, 33 OECD (Organization for Economic Co‐operation and Development) countries are studied in a panel Vector Autoregression (VAR) framework analysis over 1995–2015. There is a growing literature on the effects of income inequality on financial crises. This study provides significant evidence in favour of a positive relationship between income inequality and financial fragility, when particular factors are controlled for. Complementary findings also suggest that (a) debt accumulation in the private sector significantly depends on credit expansion, (b) the debt levels of the private sector and households co‐move over time, and (c) financial deregulation significantly contributes to financial instability. Therefore, policymakers should take into account regulatory reforms that will promote institutional and financial innovations to restrict debt accumulation and render the financial system more robust to destabilising shocks.

Suggested Citation

  • Chrysovalantis Amountzias, 2019. "An investigation of the effects of income inequality on financial fragility: Evidence from Organization for Economic Co‐operation and Development countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(1), pages 241-259, January.
  • Handle: RePEc:wly:ijfiec:v:24:y:2019:i:1:p:241-259
    DOI: 10.1002/ijfe.1660
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    Cited by:

    1. Marta de la Cuesta-González & Cristina Ruza & José M. Rodríguez-Fernández, 2020. "Rethinking the Income Inequality and Financial Development Nexus. A Study of Nine OECD Countries," Sustainability, MDPI, vol. 12(13), pages 1-18, July.
    2. Filippo Gusella & Anna Maria Variato, 2021. "Financial Instability and Income Inequality: why the connection Minsky-Piketty matters for Macroeconomics," Working Papers - Economics wp2021_15.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.

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