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Inequality, Leverage and Crises

Author

Listed:
  • Romain Ranciere

    (PSE and IMF)

  • Michael Kumhof

    (IMF)

Abstract

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.

Suggested Citation

  • Romain Ranciere & Michael Kumhof, 2011. "Inequality, Leverage and Crises," 2011 Meeting Papers 1374, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:1374
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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