Inequality, Leverage and Crises

38 Pages Posted: 1 Feb 2011

See all articles by Michael Kumhof

Michael Kumhof

Bank of England

Romain G. Rancière

University of Southern California

Multiple version iconThere are 2 versions of this paper

Date Written: November 2010

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.

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

Suggested Citation

Kumhof, Michael and Rancière, Romain G., Inequality, Leverage and Crises (November 2010). IMF Working Papers, Vol. , pp. 1-37, 2010. Available at SSRN: https://ssrn.com/abstract=1751380

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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