Does inequality lead to credit growth? Testing the Rajan hypothesis using state-level data

An investigation of the effects of income inequality on financial fragility: Evidence from Organization for Economic Co‐operation and Development countries

“…In particular, the coefficient of income inequality is positive and significant at every level of significance, an outcome that is consistent with the existing literature (Kumhof et al, 2015;Bellettini & Delbono, 2013;Perugini et al, 2015;Kumhof et al, 2015;Kirschenmann et al, 2016;Yamarik et al, 2016;Bazillier & Hericourt, 2017). In particular, the coefficient of income inequality is positive and significant at every level of significance, an outcome that is consistent with the existing literature (Kumhof et al, 2015;Bellettini & Delbono, 2013;Perugini et al, 2015;Kumhof et al, 2015;Kirschenmann et al, 2016;Yamarik et al, 2016;Bazillier & Hericourt, 2017).…”

“…These findings complement many studies across the literature based on the hypothesis of Rajan (2010) that increasing income inequality results in financial instability through excess credit, thus increasing debt accumulation (Atkinson & Morelli, 2010, 2011Büyükkarabacak & Valev, 2010;Kirschenmann et al, 2016;Kumhof et al, 2015;Perugini et al, 2015;Yamarik et al, 2016).…”

“…15 The year base of every indicator is 2010. 20 Moreover, Yamarik et al (2016) employ two additional inequality indicators: the Gini coefficient and the Theil index. 17 The countries of the sample are Australia, Austria, Belgium, Canada, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.…”

“…Yamarik et al (2016) adopt this rationale as they developed a similar model to Perugini et al (2015) for the United States over 1977-2010. It must be modelled and taken into account in order to study the probability of emerging financial crises and how income inequality plays a crucial role in this process, especially when systemic regulation is limited.…”

“…However, such indicator does not take into account the net position of corporations, and thus, it excludes the level of operating surplus that can be used to finance debt. An alternative and more accurate indicator could be the top 1% and 5% shares of the income distribution as employed in many studies (Atkinson & Morelli, 2010, 2011Kumhof et al, 2015;Perugini et al, 2015;Yamarik et al, 2016), but given the data unavailability for the whole set of the constituent countries, the operating surplus-to-labour compensation ratio is the best available alternative. The indicator of income inequality refers to the ratio of gross operating surplus of the private sector over labour compensation obtained by the OECD statistics.…”