Inequality, Leverage and Crises

Author/Editor:

Romain Ranciere ; Michael Kumhof

Publication Date:

November 1, 2010

Electronic Access:

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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 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. 2010/268

Subject:

Consumption Financial crises Income Income inequality Wages

English

Publication Date:

November 1, 2010

ISBN/ISSN:

9781455210756/1018-5941

Stock No:

WPIEA2010268

Pages:

37

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