Inequality, Leverage and Crises

Author/Editor: Kumhof, Michael ; Ranciere, Romain
Publication Date: November 01, 2010
Electronic Access: Free Full text (PDF file size is 980KB).
Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: 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 1983-2008 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 group's bargaining power is more effective.
Series: Working Paper No. 10/268
Subject(s): Borrowing | Consumption | Debt | Economic models | Financial crisis | Financial risk | Financial sector | Household credit | Income distribution | Private sector | United States

Author's Keyword(s): Income inequality | consumption inequality | income distribution | distributional conflict | leverage | financial crises | default risk | global solution methods.
Publication Date: November 01, 2010
Format: Paper
Stock No: WPIEA2010268 Pages: 37
US$18.00 (Academic Rate:
US$18.00 )
Please address any questions about this title to