University of Hertfordshire

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Original languageEnglish
Number of pages19
Pages (from-to)241-259
JournalInternational Journal of Finance and Economics
Journal publication date1 Jan 2019
Volume24
Issue1
Early online date18 Oct 2018
DOIs
Publication statusPublished - 1 Jan 2019

Abstract

The main scope of the paper is to investigate the proposition that rising income inequality results in systemic financial instability in developed countries. In particular, 33 OECD (Organization for Economic Co‐operation and Development) countries are studied in a panel Vector Autoregression (VAR) framework analysis over 1995–2015. There is a growing literature on the effects of income inequality on financial crises. This study provides significant evidence in favour of a positive relationship between income inequality and financial fragility, when particular factors are controlled for. Complementary findings also suggest that (a) debt accumulation in the private sector significantly depends on credit expansion, (b) the debt levels of the private sector and households co‐move over time, and (c) financial deregulation significantly contributes to financial instability. Therefore, policymakers should take into account regulatory reforms that will promote institutional and financial innovations to restrict debt accumulation and render the financial system more robust to destabilising shocks.

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