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Inequality, Leverage and Crises

  • Kumhof, Michael
  • Rancière, Romain

The paper studies how high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2007 both exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and an eventual financial and real crisis. The paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes. A financial crisis can reduce leverage if it is very large and not accompanied by a real contraction. But restoration of the lower income group’s bargaining power is more effective.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8179.

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Date of creation: Jan 2011
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Handle: RePEc:cpr:ceprdp:8179
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