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Discussion Paper Details

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Title: Inequality, Leverage and Crises

Author(s): Michael Kumhof and Romain Ranci�re

Publication Date: January 2011

Keyword(s): Income inequality; wealth inequality; leverage; financial crises; wealth

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Kumhof, M and Ranci�re, R. 2011. 'Inequality, Leverage and Crises'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8179