Does inequality lead to a financial crisis?

Michael Bordo, Christopher M. Meissner

Research output: Contribution to journalArticle

59 Citations (Scopus)

Abstract

The recent global crisis has sparked interest in the relationship between income inequality, credit booms, and financial crises. Rajan (2010) and Kumhof and Rancière (2011) propose that rising inequality led to a credit boom and eventually to a financial crisis in the US in the first decade of the 21st century as it did in the 1920s. Data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships. Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.

Original languageEnglish (US)
Pages (from-to)2147-2161
Number of pages15
JournalJournal of International Money and Finance
Volume31
Issue number8
DOIs
StatePublished - Dec 1 2012

Fingerprint

Financial crisis
Credit booms
Interest rates
Credit crisis
Global crisis
Income inequality
Asset prices
Economics
Top incomes
Banking crisis
Credit growth

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Credit booms
  • Financial crises
  • Financial de-regulation
  • Income inequality
  • Redistribution
  • Top incomes

Cite this

Bordo, Michael ; Meissner, Christopher M. / Does inequality lead to a financial crisis?. In: Journal of International Money and Finance. 2012 ; Vol. 31, No. 8. pp. 2147-2161.
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Does inequality lead to a financial crisis? / Bordo, Michael; Meissner, Christopher M.

In: Journal of International Money and Finance, Vol. 31, No. 8, 01.12.2012, p. 2147-2161.

Research output: Contribution to journalArticle

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