Working Paper: CEPR ID: DP8179
Authors: Michael Kumhof; Romain Ranciere
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 1983-2007 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 Codes: E21; E25; E44; G01; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in income share of the top 5% of earners (D33) | increase in leverage among the remaining 95% (G32) |
| increase in leverage among the remaining 95% (G32) | financial crises (G01) |
| increase in income share of the top 5% of earners (D33) | increase in debt-to-income ratios among lower-income households (G51) |
| increase in debt-to-income ratios among lower-income households (G51) | financial fragility and potential for a crisis (F65) |
| restoration of bargaining power for lower-income households (E25) | reduction in leverage and crisis risk (F65) |