Macroprudential policy and income inequality (original) (raw)
Related papers
Macroprudential Policy and Household Wealth Inequality
SSRN Electronic Journal
Macroprudential policies, such as caps on loan-to-value (LTV) ratios, have become part of the policy paradigm in emerging markets and advanced countries alike. Given that housing is the most important asset in household portfolios, relaxing or tightening access to mortgages may affect the distribution of household wealth in the country. In a stylised model we show that the final level of wealth inequality depends on the size of the LTV ratio, housing prices, credit cost and the strength of a bequest motive; ultimately with no unequivocal effect of LTV ratios on wealth inequality. These trade-offs are illustrated with estimations of "Gini Recentered Influence Function" regressions on household survey data from 12 eurozone countries that participated in the first wave of the Household Finance and Consumption Survey (HFCS). The results show that, among the households with active mortgages, high LTV ratios at the time of acquisition are related to high contributions to wealth inequality today, while house price increases are negatively related to inequality contributions. A proxy for the strength of bequest motives tends to be negatively related with wealth inequality, but credit cost does not show a significant link to the distribution of wealth.
Inequality, credit and financial crises
Cambridge Journal of Economics, 2015
In the three decades leading up to the financial crisis of 2008/09, income inequality rose across much of the developed world. This has led to a vigorous debate as to whether widening inequality was somehow to blame for the crisis. At the heart of this debate is the question of whether rising inequality leads to private sector credit booms, which are, in turn, widely accepted as a macroeconomic risk factor. Despite growing interest, empirical evidence on an inequality-fragility relationship is limited. That which does exist fails to tip the balance of evidence conclusively one way or the other. This research adds to this scarce body of evidence. Based on an econometric analysis of a panel of eighteen OECD countries covering the period 1970-2007, this study finds a statistically significant, positive relationship between income concentration and private sector indebtedness when controlling for conventional credit determinants. The implications of such a relationship are twofold. First, the view that the distribution of income is irrelevant to macroeconomic outcomes (implicit in mainstream economic thought) needs a second look. Second, if policy makers wish to make the financial system more robust, they should cast the net wider than regulatory and monetary policy reforms, and consider the effects of changes to the distribution income.
Does Income Inequality Have a Role in Financial Crises
Empirical evidence has identified that an increase in aggregate debt compared to aggregate income increases the risk of financial crises. At the same time, several authors have placed the blame for the Financial Crisis of 2008 on widening income inequality in developed countries, with a focus on its role in driving the extension of credit to households. This analysis therefore seeks to establish whether the aggregate bank loans to GDP ratio is dependent on inequality.
Financial development and income inequality: a panel data approach
Empirical Economics, 2015
We analyze the link between financial development and income inequality for a broad unbalanced dataset of up to 138 developed and developing countries over the years 1960 to 2008. Using credit-to-GDP as a measure of financial development, our results reject theoretical models predicting a negative impact of financial development on income inequality measured by the Gini coefficient. Controlling for country fixed effects and GDP per capita, we find that financial development has a positive effect on income inequality. These results are robust to different measures of financial development, econometric specifications, and control variables. JEL-Code: O150, O160.
Do Financial Reforms Help Stabilize Inequality?
2015
We explore the relationship between financial reforms and income inequality using a panel of 29 countries over 1975-2005. We extend panel unit root tests to allow for the presence of some financial-reform covariates and further suggest an associated but novel, semi-parametric approach. Results demonstrate that although both gross and net Gini indices follow a unit root process, this picture can change when financial reform indices are accounted for. In particular, whilst gross Gini coefcients are generally not stabilized by financial reforms, net measures are (more likely to be). Thus financial reforms enacted in the presence of a strong safety net would seem preferable.
SSRN Electronic Journal, 2019
Our study examines the dynamics between variations in bank regulatory policies and the income distribution, using an IMF database of quantified measures for financial reforms as well as the Standardized World Income Inequality Database. The unbalanced panel comprises 36 developed countries and covers a period over three decades from 1973 to 2005. We assess the potential endogeneity between bank regulations and inequality via a panel vector autoregression model. Among the regulatory reforms, we consider the deregulation of securities markets, entry barriers, credit and interest rate controls as well as the extent of privatization, international capital flows and banking supervision. We are able to provide support for the hypotheses that (i) overall, abolishing bank regulations enhances inequality in income and (ii) higher levels in inequality encourage laissez-faire policies in the banking sector. Moreover, our results highlight the importance of examining each regulatory reform individually. In particular, we endorse a relaxation of entry barriers for financial intermediaries while promoting interest rate controls, capital account restrictions and deliberate government intervention in securities markets. Keywords Income inequality • Bank regulation • Financial reform • Panel vector autoregression The opinions expressed herein are those of the authors and do not necessarily reflect those of the ECB, OeNB or the Eurosystem. Helpful suggestions by three anonymous referees, seminar participants at the OeNB, INET, and the ECB are gratefully acknowledged.
Finance and Income Inequality: Test of Alternative Theories
SSRN Electronic Journal, 2000
Although theoretical models make distinct predictions about the relation between finance and income inequality, little empirical research has been conducted to compare their relative explanatory power. We examine the relation between financial intermediary development and income inequality in a panel data set of 91 countries for the period of 1960-95. Our results provide reasonably strong evidence that inequality decreases as economies develop their financial intermediaries, consistent with Galor and Zeira (1993) and Banerjee and Newman (1993). Moreover, consistent with the insight of Kuznets, the relation between the Gini coefficient and financial intermediary development depends on the sectoral structure of the economy: a larger modern sector is associated with a smaller drop in the Gini coefficient for the same level of financial intermediary development. However, there is no evidence of an inverted-U shaped relation between financial sector development and income inequality, as suggested by Greenwood and Jovanovic (1990). The results are robust to controlling for biases introduced by simultaneity.
Finance and Income Inequality: What Do the Data Tell Us?
Southern Economic Journal, 2006
Although there are distinct conjectures about the relationship between finance and income inequality, little empirical research compares their explanatory power. We examine the relationship between finance and income inequality for 83 countries between 1960 and 1995. Because financial develop ment might be endogenous, we use instruments from the literature on law, finance, and growth to control for this. Our results suggest that, in the long run, inequality is less when financial development is greater, consistent with Galor and Zeira (1993) and Banerjee and Newman (1993). Although the results also suggest that inequality might increase as financial sector development increases at very low levels of financial sector development, as suggested by Greenwood and Jovanovic (1990), this result is not robust. We reject the hypothesis that financial development benefits only the rich. Our results thus suggest that in addition to improving growth, financial development also reduces inequality.
Effects of Bank Capital Requirement Tightenings on Inequality
SSRN Electronic Journal, 2018
Research question There is increasing interest in implications of central banks' monetary and financial stability policies for economic inequality. Not only is there a growing consensus that changes in inequality may affect central banks' goals and trade-offs. Changes in inequality due to central banks' actions also challenge other redistributive policies. While there is a surge in the literature on the effects of monetary policy on inequality, the evidence on the effects of financial stability policy on inequality is still scarce. This analysis investigates how aggregate capital requirement tightenings affect inequality among households. Contribution Based on a newly constructed narrative measure of regulatory bank capital requirement tightening events this study examines their dynamic effects on household income and expenditure inequality in the US. Anticipation effects are taken into account. And we assess the role of monetary policy in the transmission of capital requirement tightenings to inequality. Only very few studies before have investigated the effects of financial stability policy tools, but none of it has focused on capital requirement tightenings. Results and policy implications Income and expenditure inequality both decline (the latter decline being slightly less pronounced than the former). Financial income strongly drops after the regulatory events. Richer households tend to be more exposed to financial markets. Hence, their income and expenditures decline by more than those of poorer households. The monetary policy easing after the regulation contributes to the decline in inequality at longer horizons, as it cushions the negative effects of the capital requirement tightenings on wages and salaries (of lower-to middleincome households) in the medium run. Hence, tighter bank capital regulations do not worsen the inequality situation of households and, hence, do not pose an additional challenge for other redistributive policies.