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Inequality, Leverage, and Crises

Listed author(s):
  • Michael Kumhof

    (Bank of England)

  • Romain Rancière

    (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics, IMF - International Monetary Fund - International Monetary Fund (IMF))

  • Pablo Winant

    (PSE - Paris School of Economics)

The paper studies how high household leverage and crises can be caused by changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of high-income households, a large increase in debt leverage of low- and middle-income households, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises are the endogenous result of a growing income share of high-income households. The model matches the profiles of the income distribution, the debt-to-income ratio and crisis risk for the three decades preceding the Great Recession.

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Paper provided by HAL in its series Post-Print with number halshs-01207208.

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Date of creation: Mar 2015
Publication status: Published in American Economic Review, American Economic Association, 2015, 105 (3), pp.1217-1245. <10.1257/aer.20110683>
Handle: RePEc:hal:journl:halshs-01207208
DOI: 10.1257/aer.20110683
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01207208
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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