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Inequality, Leverage and Crises

  • Romain Ranciere

    (PSE and IMF)

  • Michael Kumhof


The paper studies how high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2007 both exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and an eventual financial and real crisis. The paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes. A financial crisis can reduce leverage if it is very large and not accompanied by a real contraction. But restoration of the lower income groupâs bargaining power is more effective.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1374.

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Date of creation: 2011
Date of revision:
Handle: RePEc:red:sed011:1374
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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