Inequality, leverage and crises: Theory and evidence revisited

Xinhua Gu, Pui Sun Tam, Yang Zhang and Chun Kwok Lei

The World Economy, 2019, vol. 42, issue 8, 2280-2299

Abstract: Rajan points to rising income inequality as a root cause of the recent financial crisis through high household leverage. The Rajan hypothesis has ignited debate over the relationship between inequality, leverage and crises. Kumhof, Ranciere, and Winant prove the validity of this hypothesis with a theoretical formulation, but empirical studies provide mixed evidence using different samples and estimators. To clarify this controversy, we re‐examine the issue by using the same data as in the literature and provide additional evidence after taking into account the role of asset bubbles and policy interventions. Our regression is based on a new tractable theoretical model that is supported by key stylised facts, and all our analyses confirm the existence of the inequality–leverage–crisis nexus.

Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://doi.org/10.1111/twec.12806

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:worlde:v:42:y:2019:i:8:p:2280-2299

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0378-5920

Access Statistics for this article

The World Economy is currently edited by David Greenaway

More articles in The World Economy from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().