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Inequality, Leverage and Crises: The Case of Endogenous Default

  • Michael Kumhof
  • Romain Ranciere
  • Pablo Winant

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/249.

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Length: 48
Date of creation: 17 Dec 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/249
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