Inequality, Leverage and Crises

Abstract:     
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.

Number of Pages in PDF File: 38

Keywords: Borrowing, Consumption, Debt, Economic models, Financial crisis, Financial risk, Financial sector, Household credit, Income distribution, Private sector, United States

working papers series