Key thesis:
"Rising inequality in a climate of rising consumption can lead poorer households to increase their leverage, thereby making a crisis more likely."
The descriptive evidence seems to be striking:
The simulation results of their model look insightful as well:
Their reasoning is supported by several additional arguments:
- Rajan (2010) argues that rising inequality creates a political incentive to facilitate the access of poorer people to mortgages and consumer loans.
- Fitoussi (2010) points out that rising inequality leads to an increase of the average propensity to save since rich agents tend to save a larger share of their income. This consequently brings down the average propensity of consumption and causes a persistent weakness in aggregate demand. Central banks respond to this developement by loosening their policy stance, thereby giving rise to the build-up of financial imbalances.
