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Is there a relationship between income inequality and credit cycles?

Author

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  • Tuomas Malinen

    () (University of Helsinki and HECER)

Abstract

Recent studies by Atkinson (2011); Rajan (2010); Kumhof and Ranciére (2010); Bordo and Meissner (2013) have assessed the relationship between income inequality and financial stability. Bordo and Meissner found that changes in income inequality do not have an effect on the growth of credit. We extend their study by assessing the relationship between levels of income inequality and leverage. We find that the relationship between inequality and credit is long-run, i.e. trending, in nature and that removing this relation with first differencing will lead to biased inference. In conclusion we find that income inequality is associated with increased leverage in the economy.

Suggested Citation

  • Tuomas Malinen, 2013. "Is there a relationship between income inequality and credit cycles?," Working Papers 292, ECINEQ, Society for the Study of Economic Inequality.
  • Handle: RePEc:inq:inqwps:ecineq2013-292
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    File URL: http://www.ecineq.org/milano/WP/ECINEQ2013-292.pdf
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    References listed on IDEAS

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    1. Albanesi, Stefania, 2007. "Inflation and inequality," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1088-1114, May.
    2. Nelson C. Mark & Masao Ogaki & Donggyu Sul, 2005. "Dynamic Seemingly Unrelated Cointegrating Regressions," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 797-820.
    3. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1001-1026.
    4. Andrew Leigh, 2007. "How Closely Do Top Income Shares Track Other Measures of Inequality?," Economic Journal, Royal Economic Society, vol. 117(524), pages 619-633, November.
    5. Banerjee, Anindya & Carrion-i-Silvestre, Josep Lluís, 2006. "Cointegration in panel data with breaks and cross-section dependence," Working Paper Series 591, European Central Bank.
    6. Jesper Roine & Daniel Waldenström, 2011. "Common Trends and Shocks to Top Incomes: A Structural Breaks Approach," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 832-846, August.
    7. Banerjee, Abhijit V & Duflo, Esther, 2003. "Inequality and Growth: What Can the Data Say?," Journal of Economic Growth, Springer, vol. 8(3), pages 267-299, September.
    8. Peter C. B. Phillips & Donggyu Sul, 2003. "Dynamic panel estimation and homogeneity testing under cross section dependence *," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 217-259, June.
    9. Barro, Robert J, 2000. "Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
    10. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September.
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    Citations

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    Cited by:

    1. Yamarik, Steven & El-Shagi, Makram & Yamashiro, Guy, 2016. "Does inequality lead to credit growth? Testing the Rajan hypothesis using state-level data," Economics Letters, Elsevier, vol. 148(C), pages 63-67.
    2. Mathias Klein, 2015. "Inequality and household debt: a panel cointegration analysis," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(2), pages 391-412, May.
    3. Pablo García, 2014. "Equidad y Estabilidad Macrofinanciera," Economic Policy Papers Central Bank of Chile 49, Central Bank of Chile.

    More about this item

    Keywords

    top 1% income share; bank loans; unit root; cointegration Classification-JEL: C23; D31; G21;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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