Abstract

Keywords

JEL classification

۱٫ Introduction

۲٫ Data and methodology

۳٫ Results

۳٫۱٫ Main estimations

۳٫۲٫ Interactions

۳٫۳٫ Robustness checks

۴٫ Conclusion

Appendix.

References

Abstract

This paper examines the impact of the Global Financial Crisis (GFC) on wealth inequality. We investigate this question, using data for 143 countries for the period 2010–۲۰۱۸٫ We find no significant impact of the occurrence of the crisis on wealth inequality. We show limited evidence that the severity of the banking crisis affects the change in wealth inequality. Furthermore, the impact of the GFC on the change in wealth inequality is influenced by the country characteristics: the GFC has more enhanced wealth inequality in countries with higher levels of economic and financial development as well as lower initial levels of wealth inequality. We therefore contribute to a better understanding of the real effects of banking crises by providing evidence of the distributional effects of the GFC.

۱٫ Introduction

Banking crises are common events in developed and developing countries with 151 episodes identified by Laeven and Valencia (2020) between 1970 and 2017. They have been shown to have detrimental effects on the economy by causing output losses (Kroszner et al., 2007; Dell’Ariccia et al., 2008; Devereux and Dwyer, 2016) and fiscal costs related to banking crisis resolution (Amaglobeli et al., 2015; Laeven and Valencia, 2018).

Banking crises can also exert distributional effects on the households and thus influence inequality within societies. Surprisingly, these effects have been widely ignored in the literature in spite of the widespread concerns about inequalities. We are only aware of two studies contributing to the analysis of the distributional effects of banking crises. Both these works investigate the influence of banking crises on income inequality: while Agnello and Sousa (2012) find a decline in income inequality following banking crisis episodes, De Haan and Sturm (2017) conclude that banking crises increase income inequality.

Our objective in this paper is to provide the first investigation of the impact of banking crises on wealth inequality by examining the aftermath of the Global Financial Crisis (GFC). According to the World Inequality Database, the GFC has been followed by a rise of the share of the richest 10% individuals in the largest economies: þ۲٫۴ points for the US (from 68.4% to 70.8%), þ۱۱٫۶ points for China (from 55.8% to 67.4%), and þ۲٫۳ points for France (from 56.6% to 58.9%) between 2007 and 2018. It is not, however, a general worldwide trend since some G20 countries had a reduction over the same period (2.8 points for South Africa) or a stagnation (þ۰٫۲ points for South Korea). While income inequality has come to the forefront of the public debate (e.g., Milanovic, 2016), wealth inequality is much more ignored and has been much less investigated in the literature.

Wealth inequality is, however, an issue of major economic concern. From a conceptual perspective, wealth appears to be more important than income since wealth generates income. As such, wealth inequality is a driving force of income inequality. From the perspective of the consequences, wealth inequality can have a major influence on the economy. On the one hand, higher wealth inequality may have beneficial economic effects by giving incentives to individuals to work hard and thus stimulating growth. On the other hand, it can reduce social mobility and lead to unequal opportunities (Pfeffer and Schoeni, 2016; Killewald et al., 2017). It would then be detrimental for the economy since it reduces the incentives for individuals to use at best their skills. Higher wealth inequality can furthermore favor the emergence of a plutocracy, a society ruled by the rich, with detrimental economic effects: wealthiest individuals may then exert a disproportionate political influence and shape society in line with their interests at the expense of the general welfare (Bartels, 2008; Page et al., 2013).