Inequality, Leverage, and Crises

Michael Kumhof, Romain Ranciere & Pablo Winant
American Economic Review , March 2015, Pages 1217-1245
Abstract: The paper studies how high household leverage and crises can be caused by 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 low- and middle-income households, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises are the endogenous result of a growing income share of high-income households. The model matches […]