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Inequality, Leverage and Crises: The Case of Endogenous Default

Author/Editor: Michael Kumhof | Romain Ranciere | Pablo Winant
Authorized for Distribution: December 17, 2013
Electronic Access: Free Full Text (PDF file size is 591KB)
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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 household 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 high-income households, a large increase in debt leverage of the remainder, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises arise endogenously in response to a growing income share of high-income households. The model matches the profiles of the income distribution, the debt-to-income ratio and crisis risk for the three decades prior to the Great Recession.
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Series: Working Paper No. 13/249
Subject(s): Income distribution | Private sector | Credit demand | Debt | Financial crisis
    Published:   December 17, 2013        
    ISBN/ISSN:   9781484310762/1018-5941   Format:   Paper
    Stock No:   WPIEA2013249   Pages:   48
    Price:   US$18.00
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