TAILIEUCHUNG - Inequality, Leverage and Crises by Michael Kumhof and Romain Rancière

Worldwide, 50 percent of adults report having an individual or joint account at a formal financial institution. But while account penetration is nearly universal in high-income economies, with 89 percent of adults reporting that they have an account at a formal financial institution, it is only 41 percent in developing economies. Globally, more than billion adults do not have a formal account, most of them in developing economies. The differences in account ownership by individual characteristics are particularly large in developing economies. While 46 percent of men have a formal account, only 37 percent of women do. Indeed, there. | WP 10 268 Inequality Leverage and Crises Michael Kumhof and Romain Rancière INTERNATIONAL MONETARY FUND 2010 International Monetary Fund WP 10 268 IMF Working Paper Research Department Inequality Leverage and Crises Prepared by Michael Kumhof and Romain Rancière Authorized for distribution by Douglas Laxton November 2010 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author s and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author s and are published to elicit comments and to further debate. The paper studies how high 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 the rich a large increase in leverage for the remainder and an eventual financial and real crisis. The paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes. A financial crisis can reduce leverage if it is very large and not accompanied by a real contraction. But restoration of the lower income group s bargaining power is more effective. JEL Classification Numbers E20 E25. Keywords Income inequality consumption inequality income distribution distributional conflict leverage financial crises default risk global solution methods. Author s E-Mail Address mkumhof@ rranciere@ 2 Contents I. Introduction. 3 II. Stylized Facts. 5 III. The Model. 8 A. Investors. 8 B. Workers. 10 C. Technology. 11 D. Equilibrium . 12 E. Calibration . 12 F. Solution Methods . 13 IV. Simulated Scenarios . 15 A. Baseline Scenario . 15 B. Uncertainty. 17 C. High Leverage - Aggravating Factors. 17 D. High Leverage - Solutions . 20 E. Further Discussion . 21 V. Conclusions . 22 References . 23 Figures 1. Income Inequality and Household Leverage. .

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