Do Financial Crises increase Income Inequality?

40 Pages Posted: 30 Nov 2019

See all articles by Cristina Bodea

Cristina Bodea

Michigan State University

Christian Houle

Michigan State University - Department of Political Science

Hyunwoo Kim

Michigan State University

Date Written: November 13, 2019

Abstract

This paper investigates the impact of economic crises on income inequality. Important evidence has emerged that in the aftermath of crises politics becomes polarized and economists have linked this to greater differences in income due to crises. The evidence however on whether crises can be linked to divergent incomes is weak and plagued by i) the possibility of a reverse effect going from great disparity in incomes to major economic crises; ii) the persistent nature of income inequality; and iii) important measurement error in both the dependent and independent variables. We use the longest time stretch of available data on crises and types of crises (Reinhart and Rogoff 2011) and income inequality (Solt 2009), as well as General Method of Moments and Error Correction Models to more credibly tackle the complex theoretical and empirical relationship between crises and inequality. We find strong evidence that currency, banking, inflation and debt crises increase inequality, particularly in the long run.

Keywords: Financial crises; Inequality; Reverse causality; Inequality persistence; Measurement error; Long term effect

JEL Classification: D3, D6, G01

Suggested Citation

Bodea, Cristina and Houle, Christian and Kim, Hyunwoo, Do Financial Crises increase Income Inequality? (November 13, 2019). Available at SSRN: https://ssrn.com/abstract=3486470

Cristina Bodea (Contact Author)

Michigan State University ( email )

Agriculture Hall
East Lansing, MI 48824-1122
United States

Christian Houle

Michigan State University - Department of Political Science ( email )

East Lansing, MI 48824
United States

Hyunwoo Kim

Michigan State University

Agriculture Hall
East Lansing, MI 48824-1122
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
6
Abstract Views
103
PlumX Metrics