Inequality, Leverage, and Crises

  • Michael Kumhof
    c/o Research Hub, Bank of England, Threadneedle Street, London EC2R 8AH, UK (e-mail: )
  • Romain Rancière
    International Monetary Fund, Research Department, 700 19th Street NW, Washington, DC 20431, and Paris School of Economics (email: )
  • Pablo Winant
    Paris School of Economics, 106-112 Boulevard de l'Hôpital, 75013 Paris, France (email: )

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<jats:p> The paper studies how high household leverage and crises can be caused by 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 low- and middle-income households, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises are the endogenous result of 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 preceding the Great Recession. (JEL D14, D31, D33, E32, E44, G01, N22) </jats:p>

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