Inequality, Leverage and Crises: The Case of Endogenous Default
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Summary:
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.
Series:
Working Paper No. 2013/249
Subject:
Consumption Income distribution Income inequality Income shocks National accounts Personal income
English
Publication Date:
December 17, 2013
ISBN/ISSN:
9781484310762/1018-5941
Stock No:
WPIEA2013249
Pages:
48
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