Inequality, Leverage and Crises
- ISBN-10
- 1455210757
- ISBN-13
- 9781455210756
- Category
- Business & Economics
- Pages
- 39
- Language
- English
- Published
- 2010-11-01
- Publisher
- International Monetary Fund
- Authors
- Mr.Michael Kumhof, Mr.Romain Ranciere
Description
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.
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