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Does income inequality lead to banking crises in developing countries? Empirical evidence from cross-country panel data

Dong-Eun Rhee and Hyoungjong Kim

Economic Systems, 2018, vol. 42, issue 2, 206-218

Abstract: This study empirically examines whether increasing income inequality results in banking crises using panel data for 68 countries covering the years 1973 to 2010. The results show that developing countries with high inequality tend to have higher levels of domestic credit and that domestic credit booms increase the probability of banking crises. We also find that developing economies display direct channels from inequality to banking crises without an association with credit booms. We find no consistent evidence that income inequality contributes to banking crises in advanced economies. In developing countries, the probability of banking crises increases dramatically as income inequality levels increase: The probability of a systemic banking crisis within three years is 9.5% when the Gini is as low as 0.2 in developing countries and increases to 57.4% when the Gini is 0.4. These results are robust to several specifications.

Keywords: Income inequality; Banking crisis; Household debt (search for similar items in EconPapers)
JEL-codes: D63 G01 H12 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:ecosys:v:42:y:2018:i:2:p:206-218