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Credit, crises and inequality

Author

Listed:
  • Bridges, Jonathan

    (Bank of England)

  • Green, Georgina

    (Bank of England)

  • Joy, Mark

    (Bank of England)

Abstract

Using a panel dataset of 26 advanced economies over the five decades preceding the Covid crisis, we show that inequality rises following recessions and that rapid credit growth in the run up to a downturn exacerbates that effect. A one standard deviation credit boom leads to a 40% amplification of the distributional fallout in the bust that follows. These links between inequality, credit and downturns are particularly significant for recessions associated with financial crises. We also find some evidence that low bank capital ahead of a downturn amplifies the inequality increase that follows. These insights add a new dimension to policy cost-benefit analysis, at the distributional level. Newly established macroprudential regimes have been empowered with tools to safeguard financial stability by bolstering both lender and borrower resilience. Using those tools may have distributional effects, potentially limiting individual borrowing choices. Our findings make clear, however, that not using those tools can lead to distributional costs, in the event of an untamed crisis.

Suggested Citation

  • Bridges, Jonathan & Green, Georgina & Joy, Mark, 2021. "Credit, crises and inequality," Bank of England working papers 949, Bank of England.
  • Handle: RePEc:boe:boeewp:0949
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Recessions; local projections; inequality; macroprudential policy;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • G01 - Financial Economics - - General - - - Financial Crises
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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