Credit, Crises and Inequality

46 Pages Posted: 2 Feb 2022

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Abstract

Using a panel dataset of 26 advanced economies over the five decades preceding the Covid-19 crisis, we show that inequality rises following recessions and that rapidcredit growth in the run up to a downturn exacerbates that effect. A one standard deviation credit boom leads to a 40% amplification of the distributional fallout in the bust that follows. These links between inequality, credit and downturns are particularly significant for recessions associated with financial crises. We also find some evidence that low bank capital ahead of a downturn amplifies the inequality increase that follows. These insights add a new dimension to policy cost-benefit analysis, at the distributional level. Newly established macroprudential regimes have been empowered with tools to safeguard financial stability by bolstering both lender and borrower resilience. Using those tools may have distributional effects, potentially limiting individual borrowing choices. Our findings make clear, however, that not using those tools can lead to distributional costs, in the event of an untamed crisis.

Keywords: Recessions, inequality, macroprudential policy

Suggested Citation

Green, Georgina and Bridges, Jonathan and Joy, Mark, Credit, Crises and Inequality. Available at SSRN: https://ssrn.com/abstract=4024055 or http://dx.doi.org/10.2139/ssrn.4024055

Georgina Green (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Jonathan Bridges

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Mark Joy

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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