Income Inequality and Market Fragility: Some Empirics in the Political Economy of Finance

by Sabrina I. Pacifici on January 22, 2013

Hockett, Robert C. and Dillon, Daniel, Income Inequality and Market Fragility: Some Empirics in the Political Economy of Finance (January 21, 2013). Available at SSRN

  • “In a modern market economy with a developed financial sector, one would expect the Keynes-Kalecki update of the political economists’ crisis dynamic to work through the medium of ever more sophisticated consumer- and mortgage-debt products as well as associated derivative financial instruments. These would respond to both heightened investment demand at the top of the increasingly skewed distribution, and heightened borrowing needs under the top of the distribution. One would also expect leverage-fueled asset price bubbles and busts and their debt-deflationary sequels to be larger and longer, respectively, than in times past, owing to mortgage debt’s tending to lengthen the leverage cycle.
    Using autoregressive filtering, time-lagged cross-correlations, and cognate statistical methods on large sets of data that include income inequality and debt trends, consumption and price indices, current account balances and other indicators of macroeconomic performance, we find strong support for the proposition that our “financialized” rendition of the Keynes-Kalecki-supplemented political economists’ crisis dynamic links significant income and wealth inequality to market fragility. This goes a long way toward explaining, among other things, a remarkably rich set of parallels that we find between the paired inequality and market calamity of 1928-29 on the one hand, and that of 2008-09 on the other hand. Our results also bear implications for the project of financial regulation. While gathering income and wealth inequality do not render that project futile, they do seem, ironically, to render it simultaneously more urgent and more difficult.”

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