[lbo-talk] What's going on with the IMF ?

Doug Henwood dhenwood at panix.com
Wed Feb 2 06:45:52 PST 2011


On Feb 2, 2011, at 9:35 AM, Ira Glazer wrote:


> " The IMF has published a paper entitled *Inequality, Leverage and
> Crisis*arguing that the extreme gap between rich and poor – with
> echoes of the US
> in the late 1920s – was an underlying cause of the Great Recession from
> 2008-2009.

http://www.imf.org/external/pubs/ft/wp/2010/wp10268.pdf

IMF Working Paper Research Department

Inequality, Leverage and Crises Prepared by Michael Kumhof and Romain Rancière Authorized for distribution by Douglas Laxton November 2010

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.

Abstract

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.



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