Inequality, Leverage and Crises
November 1, 2010
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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.
Subject: Consumption, Financial crises, Income, Income inequality, Wages
Keywords: capital stock, physical capital, WP
Pages:
37
Volume:
2010
DOI:
Issue:
268
Series:
Working Paper No. 2010/268
Stock No:
WPIEA2010268
ISBN:
9781455210756
ISSN:
1018-5941
