Inequality, Leverage and Crises; The Case of Endogenous Default
Michael Kumhof (),
Romain Ranciere and
No 13/249, IMF Working Papers from International Monetary Fund
The paper studies how high household 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 high-income households, a large increase in debt leverage of the remainder, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises arise endogenously in response to 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 prior to the Great Recession.
Keywords: Debt; Credit demand; Financial crises; Financial crisis; Income distribution; Income inequality; Private sector; wealth inequality, debt leverage, wealth in utility, global solution methods, recession, crisis probability, Aggregate Factor Income Distribution, Financial Markets and the Macroeconomy, wealth inutility, global solution methods., (search for similar items in EconPapers)
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