Inequality, Leverage and Crises
IMF Working Papers, November 1, 2010
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- Inequality, Leverage and Crises
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Bibliographic details
- Authors: Romain Ranciere, Michael Kumhof
- Published: November 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455210756.001
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.
- Restoration of the lower income group's bargaining power is more effective.
Empirical findings
- Periods analyzed: 1920-1929 and 1983-2008.
- Observed co-movements in these periods:
- Large increase in the income share of the rich.
- Large increase in leverage for the remainder.
- Eventual financial and real crisis.
Theoretical model and mechanisms
- The model generates high leverage and crises endogenously as a result of a shift in bargaining powers over incomes.
- Bargaining-power shifts alter income distribution, producing macrofinancial dynamics that can culminate in crises.
Policy-relevant conclusions
- A very large financial crisis that is not accompanied by a real contraction can reduce leverage.
- Restoring the lower income group's bargaining power is presented as a more effective way to address leverage buildup and crisis risk.