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Is there a relationship between income inequality and credit cycles?

Working Paper 2013-292


Recent studies by Atkinson (2011); Rajan (2010); Kumhof and RanciΓ©re (2010); Bordo and Meissner (2013) have assessed the relationship between income inequality and financial stability. Bordo and Meissner found that changes in income inequality do not have an effect on the growth of credit. We extend their study by assessing the relationship between levels of income inequality and leverage. We find that the relationship between inequality and credit is long-run, i.e. trending, in nature and that removing this relation with first differencing will lead to biased inference. In conclusion we find that income inequality is associated with increased leverage in the economy.

Authors: Tuomas Malinen.

Keywords: top 1% income share, bank loans, unit root, cointegration
JEL: I31, D60.