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Historical Patterns of Inequality and Productivity around Financial Crises

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Abstract

To understand the determinants of financial crises, previous research focused on developments closely related to financial markets. In contrast, this paper considers changes originating in the real economy as drivers of financial instability. Based on long-run historical data for advanced economies, I find that rising top income inequality and low productivity growth are robust predictors of crises – even outperforming well known early-warning indicators such as credit growth. Moreover, if crises are preceded by such developments, output declines more during the subsequent recession. In addition, I show that asset booms explain the relation between income inequality and financial crises in the data.

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  • Paul, Pascal, 2017. "Historical Patterns of Inequality and Productivity around Financial Crises," Working Paper Series 2017-23, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2017-23
    DOI: 10.24148/wp2017-23
    Note: First online version: September 2017.
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    File URL: http://www.frbsf.org/economic-research/publications/working-papers/2017/23/
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    Cited by:

    1. Michael T. Kiley, 2018. "What Macroeconomic Conditions Lead Financial Crises?," Finance and Economics Discussion Series 2018-038, Board of Governors of the Federal Reserve System (US).
    2. repec:kap:jecinq:v:16:y:2018:i:2:d:10.1007_s10888-018-9387-9 is not listed on IDEAS
    3. Isabel Cairo & Jae W. Sim, 2018. "Income Inequality, Financial Crises, and Monetary Policy," Finance and Economics Discussion Series 2018-048, Board of Governors of the Federal Reserve System (US).
    4. Paul, Pascal, 2017. "A Macroeconomic Model with Occasional Financial Crises," Working Paper Series 2017-22, Federal Reserve Bank of San Francisco.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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