The effects of financial crisis on income inequality

Abstract

Summary Motivation Do financial crises affect everyone equally? Despite the growing concern about income inequality recently, mixed empirical findings have resulted in a long‐standing debate about the distribution of income in the aftermath of financial crises. Purpose The study examines how different types of financial crises affect the distribution of income. Methods and approach In this study we used a two‐step system Generalized method of moments (GMM) model to explore the effects of financial crisis on income inequality. Findings Any type of financial crisis results in a larger income gap between the rich and the poor. Although little attention has been given to debt and twin and triple crises, they are associated with higher income inequality than banking and currency crises. We also show that the effects of banking crises on income inequality in low‐income, lower‐middle income and upper‐middle income countries (LICs, LMICs and UMICs respectively) are more pronounced than in high‐income countries (HICs). Policy implications Long‐ and medium‐term plans for social assistance programmes in LICS, LMICs and UMICs are needed and should be flexible so that social safety nets can be rapidly adjusted to protect vulnerable groups. Maintaining a high level of fiscal balance during tranquil periods is critical to implementing welfare state expansion policies in times of crisis. Top marginal income and estate taxes should be raised to avoid very high concentrations of income in the aftermath of financial crises. The minimum wage should also be raised to protect low‐income workers.

The political budget cycles in emerging and developing countries

“…However, government expenditure could persist over time, indicating that not including the lagged dependent variable in our regressions could result in omitted variable bias (Nguyen, 2021b). Nevertheless, the inclusion of the lagged dependent variable will mislead OLS estimates due to the correlation between the lagged dependent variable and the error term (Baltagi, 2013; Bermpei et al ., 2018).…”

Financial Crises and Inequality: Exploring the Relationship between Delinquency and Greater Polarization

“…Rajan essentially drew one of the first links between income inequality, household debt and how household consumption ties into the equation. He justified this correlation by identifying how a better means of measuring low and middle-incomes having higher indebtedness was due to them 'living beyond their means' and how the State played an important role in facilitating credit as opposed to encouraging savings [15] . In sum, despite the period leading up to the GFC being identified as a period of 'optimism' and a time in which investors could believe household demand was at a high -this was simply a result of households not having enough disposable income and savings.…”

Financial crises and the national logistics performance: Evidence from emerging and developing countries

“…It is also worth noting that financial problems do not confine to firm levels. In fact, indebted countries, especially in what regards to emerging and developing countries, tend to implement drastic spending cuts during periods of financial crises due to rising public debts and budget deficits (Nguyen, 2021). This would be a significant setback in the development of transport infrastructure as logistics‐supported infrastructure will be postponed or cancelled (ITF, 2013; Moschouli et al, 2019), which in turn negatively influences the market size and the national logistics performance.…”

“…We pay special attention to emerging and developing countries as their logistics sectors have been expanding rapidly due to globalisation, which is an essential dynamic for global growth. Moreover, financial crises can be considered a phenomenon in emerging and developing countries since 92% of financial crises occurred in those countries over the period 1950–2019 (Nguyen, 2021). More importantly, the effects of financial crises on the logistics performance in low‐ and middle‐income countries are overlooked by the literature as previous studies tend to focus on the logistics industry in advanced countries during the Great Recession (see, e.g., de Leeuw & Wiers, 2015; Moschovou & Tyrinopoulos, 2018; Solakivi et al, 2018) or significant bankrupt cases of major logistics companies in the world (Kwak et al, 2005; Lee, 1999).…”