Does Inequality Lead to a Financial Crisis?
The recent global crisis has sparked interest in the relationship between income inequality, credit booms, and financial crises. Rajan (2010) and Kumhof and Rancière (2011) propose that rising inequality led to a credit boom and eventually to a financial crisis in the US in the first decade of the 21st century as it did in the 1920s. Data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships. Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.
|Date of creation:||Mar 2012|
|Date of revision:|
|Publication status:||published as Bordo, Michael D. & Meissner, Christopher M., 2012. "Does inequality lead to a financial crisis?," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2147-2161.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.orgEmail:
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Martha L. Olney, 1999. "Avoiding Default: The Role Of Credit In The Consumption Collapse Of 1930," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 319-335, February.
- Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
- Ben Bernanke & Mark Gertler, 1999.
"Monetary policy and asset price volatility,"
Federal Reserve Bank of Kansas City, issue Q IV, pages 17-51.
- Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
- Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2009.
"Top Incomes in the Long Run of History,"
NBER Working Papers
15408, National Bureau of Economic Research, Inc.
- Gadi Barlevy & Daniel Tsiddon, 2004.
"Earnings Inequality and the Business Cycle,"
NBER Working Papers
10469, National Bureau of Economic Research, Inc.
- Enrique G. Mendoza & Marco E. Terrones, 2008.
"An Anatomy Of Credit Booms: Evidence From Macro Aggregates And Micro Data,"
NBER Working Papers
14049, National Bureau of Economic Research, Inc.
- Enrique G. Mendoza & Marco E. Terrones, 2008. "An anatomy of credit booms: evidence from macro aggregates and micro data," International Finance Discussion Papers 936, Board of Governors of the Federal Reserve System (U.S.).
- Marco Terrones & Enrique G. Mendoza, 2008. "An Anatomy of Credit Booms; Evidence From Macro Aggregates and Micro Data," IMF Working Papers 08/226, International Monetary Fund.
- Olney, Martha L., 1989. "Credit as a Production-Smoothing Device: The Case of Automobiles, 1913–1938," The Journal of Economic History, Cambridge University Press, vol. 49(02), pages 377-391, June.
- Mishkin, Frederic S., 1978. "The Household Balance Sheet and the Great Depression," The Journal of Economic History, Cambridge University Press, vol. 38(04), pages 918-937, December.
- Roine, Jesper & Vlachos, Jonas & Waldenström, Daniel, 2007.
"The Long-run Determinants of Inequality: What Can We Learn from Top Income Data?,"
Working Paper Series
721, Research Institute of Industrial Economics, revised 30 Apr 2008.
- Roine, Jesper & Vlachos, Jonas & Waldenström, Daniel, 2009. "The long-run determinants of inequality: What can we learn from top income data?," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 974-988, August.
- Kumhof, Michael & Rancière, Romain, 2011.
"Inequality, Leverage and Crises,"
CEPR Discussion Papers
8179, C.E.P.R. Discussion Papers.
- Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 51-82, 04.
- Wojciech Kopczuk & Emmanuel Saez & Jae Song, 2010. "Earnings Inequality and Mobility in the United States: Evidence from Social Security Data since 1937," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 91-128, February.
- Eugene N. White, 2013.
"Lessons from the Great American Real Estate Boom and Bust of the 1920s,"
in: Housing and Mortgage Markets in Historical Perspective, pages 115-158
National Bureau of Economic Research, Inc.
- Eugene N. White, 2009. "Lessons from the Great American Real Estate Boom and Bust of the 1920s," NBER Working Papers 15573, National Bureau of Economic Research, Inc.
- Schularick, Moritz & Taylor, Alan M., 2009.
"Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008,"
CEPR Discussion Papers
7570, C.E.P.R. Discussion Papers.
- Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-61, April.
- Moritz Schularick & Alan M. Taylor, 2009. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008," NBER Working Papers 15512, National Bureau of Economic Research, Inc.
- Olivier Jeanne & Michael D. Bordo, 2002.
"Monetary Policy and Asset Prices; Does "Benign Neglect" Make Sense?,"
IMF Working Papers
02/225, International Monetary Fund.
- Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-64, Summer.
- Attanasio, Orazio P & Weber, Guglielmo, 1994. "The UK Consumption Boom of the Late 1980s: Aggregate Implications of Microeconomic Evidence," Economic Journal, Royal Economic Society, vol. 104(427), pages 1269-1302, November.
- James Lothian, 2011. "Why Money Matters: A Fourth Natural Experiment," Open Economies Review, Springer, vol. 22(2), pages 179-187, April.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:17896. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.