Inequality, Leverage and Crises

41 Pages Posted: 18 Jan 2011

See all articles by Michael Kumhof

Michael Kumhof

Bank of England

Romain G. Rancière

University of Southern California

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Date Written: January 2011

Abstract

The paper studies how high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 192'21929 and 1983-2007 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.

Keywords: Income inequality, wealth inequality, leverage, financial crises, wealth

JEL Classification: E21, E25, E44, G01, J31

Suggested Citation

Kumhof, Michael and Rancière, Romain G., Inequality, Leverage and Crises (January 2011). CEPR Discussion Paper No. DP8179. Available at SSRN: https://ssrn.com/abstract=1742724

Michael Kumhof (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Romain G. Rancière

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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