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Inequality, Leverage and Crises

Romain Ranciere and Michael Kumhof ()

No 1374, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: The paper studies how high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2007 both exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and an eventual financial and real crisis. The paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes. A financial crisis can reduce leverage if it is very large and not accompanied by a real contraction. But restoration of the lower income groupâs bargaining power is more effective.

Date: 2011
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Related works:
Journal Article: Inequality, Leverage, and Crises (2015) Downloads
Working Paper: Inequality, Leverage, and Crises (2015)
Working Paper: Inequality, Leverage, and Crises (2015)
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Working Paper: Inequality, Leverage and Crises (2011) Downloads
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