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Inequality, Leverage and Crises; The Case of Endogenous Default

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  • Michael Kumhof
  • Romain Ranciere
  • Pablo Winant

Abstract

The paper studies how high household leverage and crises can arise as a result of 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 the remainder, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises arise endogenously in response to 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 prior to the Great Recession.

Suggested Citation

  • Michael Kumhof & Romain Ranciere & Pablo Winant, 2013. "Inequality, Leverage and Crises; The Case of Endogenous Default," IMF Working Papers 13/249, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/249
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Quels liens entre inégalités, redistribution et croissance ?
      by ? in D'un champ l'autre on 2014-02-28 21:05:00
    2. Les riches et la Grande Récession
      by ? in D'un champ l'autre on 2014-12-21 15:57:00

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    Cited by:

    1. Mikkel Hermansen & Oliver Röhn, 2017. "Economic resilience: The usefulness of early warning indicators in OECD countries," OECD Journal: Economic Studies, OECD Publishing, vol. 2016(1), pages 9-35.
    2. Klein, Mathias & Krause, Christopher, 2015. "Technology-Labor and Fiscal Spending Crowding-in Puzzles: The Role of Interpersonal Comparison," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113075, Verein für Socialpolitik / German Economic Association.
    3. repec:zbw:rwirep:0509 is not listed on IDEAS
    4. Rémi Bazillier & Jérôme Héricourt, 2014. "The Circular Relationship between Inequality, Leverage, and Financial Crises: Intertwined Mechanisms and Competing Evidence," Working Papers 2014-22, CEPII research center.
    5. Christian Alexander Belabed, 2015. "Income Distribution and the Great Depression," IMK Working Paper 153-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    6. Oliver Röhn & Aida Caldera Sánchez & Mikkel Hermansen & Morten Rasmussen, 2015. "Economic resilience: A new set of vulnerability indicators for OECD countries," OECD Economics Department Working Papers 1249, OECD Publishing.
    7. Mathias Klein & Christopher Krause, 2014. "Income Redistribution, Consumer Credit,and Keeping up with the Riches," Ruhr Economic Papers 0509, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    8. Till van Treeck, 2015. "r>g: Why the ‘Piketty Debate’ Unsettles Germany’s Economic Experts," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 16(1), pages 26-34, May.
    9. Mikhail Stolbov, 2015. "Anatomy of international banking crises at the onset of the Great Recession," International Economics and Economic Policy, Springer, vol. 12(4), pages 553-569, October.
    10. Alvarez-Cuadrado, Francisco & Japaridze, Irakli, 2017. "Trickle-down consumption, financial deregulation, inequality, and indebtedness," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 1-26.
    11. Barry Z. Cynamon & Steven M. Fazzari, 2016. "Inequality, the Great Recession and slow recovery," Cambridge Journal of Economics, Oxford University Press, vol. 40(2), pages 373-399.
    12. David Pothier & Damien Puy, 2014. "Demand Composition and Income Distribution," IMF Working Papers 14/224, International Monetary Fund.
    13. Klein, Mathias & Krause, Christopher, 2014. "Income Redistribution, Consumer Credit,and Keeping up with the Riches," Ruhr Economic Papers 509, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    14. repec:voj:journl:v:63:y:2016:i:1:p:1-24 is not listed on IDEAS
    15. Sun, Lixin, 2015. "Quantifying the Effects of Financialisation and Leverage in China," MPRA Paper 69938, University Library of Munich, Germany.

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