Does Inequality Lead to a Financial Crisis? Revisited

Xinhua Gu · Bihong Huang

45 citations0/0 files storedReview of Development Economics

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Economic Theory and Policy Global Financial Crisis and Policies Housing, Finance, and Neoliberalism

Abstract

Abstract Financial crises have been attributed to rising income inequality via its induced high household leverage as observed in the USA and similar economies. Alternatively it has been suggested this is not a general relationship since it was found that inequality had no bearing on crises in 14 advanced countries over 1920–2008; instead, low interest rates and business cycle expansions are found to be the only two robust determinants of credit booms leading to crises. Using a similar dataset, this paper provides no support for the generality of the above findings by embracing country heterogeneity. The paper shows that real evidence still points back to the inequality‐leverage–crisis nexus for financialized economies. The implication is that finance can hardly be sustainable under rising inequality.

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2015Finance and Income Inequality in OECD Countries 2018The drivers of household indebtedness reconsidered: An empirical evaluation of competing arguments on the macroeconomic determinants of household indebtedness in OECD countries 2016Does inequality lead to credit growth? Testing the Rajan hypothesis using state-level data 2019Inequality, leverage and crises: Theory and evidence revisited

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