The circular relationship between inequality, leverage and financial crises

Remi Bazillier and Jérôme Héricourt

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: In this paper, we put into perspective the recent literature which points to inequality as a possible cause of credit bubbles, by reintegrating it into a more general analysis on the two-way relationship between inequality and finance. We focus more specifically on situations where high inequalities and widespread access to credit coexist, and argue that, even when institutions maintain more or less equal access to finance, there may be a dynamic, positive circular relationship between inequality and financial development. However, even if there is some evidence in the literature of a positive causal impact of inequality on credit, this does not preclude other important, cofounding factors. The conclusions concerning the distributional impact of finance are more ambiguous. A survey of the empirical literature highlights several issues that must be tackled. First, endogeneity: reverse causality and coincidental factors are major concerns. Second, the choice of consistent measurements for the key variables (both credit and inequality) has strong empirical implications, and must be grounded on relevant theoretical channels. Third, those circular dynamics have substantial policy implications for emerging economies, since an increasing number face a joint increase in inequality and credit.

Keywords: Causality; Finance; Inequality; Institutions; Inégalités; Causalité (search for similar items in EconPapers)
Date: 2016
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01375654
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Citations: View citations in EconPapers (5)

Published in Journal of Economic Surveys, 2016, 31 (2), pp.463-496. ⟨10.1111/joes.12150⟩

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Related works:
Journal Article: THE CIRCULAR RELATIONSHIP BETWEEN INEQUALITY, LEVERAGE, AND FINANCIAL CRISES (2017)
Working Paper: The circular relationship between inequality, leverage and financial crises (2016)
Working Paper: The Circular Relationship between Inequality, Leverage, and Financial Crises (2016)
Working Paper: The Circular Relationship between Inequality, Leverage, and Financial Crisis (2015)
Working Paper: The Circulare Relationship between inequality, Leverage and Financial Crisis (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:halshs-01375654

DOI: 10.1111/joes.12150

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