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Does Inequality Lead to a Financial Crisis? Revisited
Author(s) -
Gu Xinhua,
Huang Bihong
Publication year - 2014
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12099
Subject(s) - economics , generality , leverage (statistics) , inequality , financial crisis , boom , economic inequality , nexus (standard) , business cycle , household debt , monetary economics , debt , macroeconomics , mathematical analysis , mathematics , management , machine learning , environmental engineering , computer science , engineering , embedded system
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.