Inequality, Leverage and Crises
38 Pages Posted: 1 Feb 2011
Date Written: November 2010
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
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