Inequality, Leverage and Crises: The Case of Endogenous Default

By Michael Kumhof, Romain Rancière, Pablo Winant. Social Science Research Network, 2013

819 citations recorded by the source corpus.

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 debtleverage 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 theincome distribution, the debt-to-income ratio and crisis risk for the three decades prior to the Great Recession.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/b926a50e1b6186d9d2ed722874718d975293e5fe

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Citations in the corpus

Debt and Financial Vulnerability on the Verge of Retirement (2019, background): “Yet another strand of literature has cited the impact of income inequality as an explanation for the rapid rise in debt (Kumhof, Ranciere, and Winant, 2015).”
Within-Firm Pay Inequality (2017, background): “…market investors have recently joined the debate by expressing concerns about high income inequalitywithin firms: “High pay disparities inside a company can hurt employee morale and productivity, and have a negative impact on a company’s overall performance” (Julie Fox Gorte, PAX World Management).”
CENTRAL BANK POLICIES AND INCOME AND WEALTH INEQUALITY: A SURVEY (2019, neutral): “Finally, it has been argued that more income inequality leads to higher household indebtedness, fuels asset market bubbles, and raises ﬁnancial instability (Coibion et al. , 2014; Kumhof et al. , 2015; Kirschenmann et al. , 2016; Perugini et al. , 2016).”
Are Low Real Interest Rates Here to Stay (2017, methodology): “The relationship between national saving rates 12This general mechanism has been incorporated in recent models, e.g., in Eggertsson and Mehrotra (2014) and Kumhof, Ranciere, and Winant (2015).”
The Chicago Plan Revisited (2012, background): “As shown in Kumhof and Rancière (2010) and Kumhof et al. (2012), such inequalities can make economies more vulnerable to financial crises, and they can contribute to current account imbalances.”
Financial Frictions and the Wealth Distribution (2019, neutral): “This exercise has allowed us to argue that the wealth distribution among households is central to the analysis of the effects of financial frictions. More concretely, we have shown how the total level of endogenous aggregate risk creates an endogenous regime-switching process for output, interest ra”