Inequality, Leverage, and Crises

Journal article: The paper studies how high household leverage and crises can be caused by changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of high-income households, a large increase in debt leverage of low- and middle-income households, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises are the endogenous result of a growing income share of high-income households. The model matches the profiles of the income distribution, the debt-to-income ratio and crisis risk for the three decades preceding the Great Recession.

Author(s)

Michael Kumhof, Romain Rancière, Pablo Winant

Journal
  • American Economic Review
Date of publication
  • 2015
Keywords JEL
D14 D31 D33 E32 E44 G01 N
Keywords
  • Household leverage
  • Crises
Pages
  • 1217-1245
Version
  • 1
Volume
  • 105