Date of Degree


Document Type


Degree Name





Wim Vijverberg

Committee Members

Paul Krugman

Suresh Naidu

George Vachadze

Subject Categories

Econometrics | Economic History | Economic Theory | Finance | Income Distribution | International Economics | Macroeconomics


wealth inequality, financial crisis, cointegration, degree distribution, financial network


This dissertation consists of three chapters. . .

Chapter 1: Aggregate Wealth and Its Distribution as Determinants of Financial Crises: Panel Evidence This essay investigates the relationship between wealth inequality and financial crises across a panel of nine advanced economies over the past 100 years. While substantiation of a role for income inequality is ambiguous in the literature, evidence is presented suggesting a unique capacity for the accumulation of assets to increase the likelihood of a future financial crisis episode. Testing long-run panel data with a reduced form, two-way fixed effects model, estimates suggest that increasing wealth inequality, in an economy with high levels of aggregate wealth as measured by the wealth-income ratio, has a significantly positive and increasing marginal effect on the likelihood of future financial crises, particularly stock market crashes. Predicted probabilities from country-specific fixed effect logit models closely track the incidence of financial crises in the United States and United Kingdom over the last century. It is argued that these results reveal an important role for the distribution of accumulated assets in the macro-financial stability of rich countries. The distribution of stocks may capture structural vulnerabilities that the distribution of flows cannot expose, and hence more unequal countries in wealth face greater financial instability. An economic network hypothesis, elaborated in Chapter 2, is proposed for interpreting these results.

Chapter 2: Network Defect: Wealth Inequality, Network Topology, and Financial Crisis If two, otherwise identical, economies were distinguished only by their distributions of wealth, are they equally stable in response to a random shock? This essay proposes a theoretical financial network model to understand the relationship between wealth inequality and financial crises. In a financial network, financial assets link individual asset and liability holders to form a web of economic connections. The total connectivity of an individual is de- scribed by their degree, and the overall distribution of connections in the network is imposed through a degree distribution—equivalent to the wealth distribution as incoming connections represent assets and outgoing connections liabilities. A network’s topology varies with the level of wealth inequality and total wealth and together, simulations show, they determine network contagion in the event of a random negative income shock to some individual. Random network simulations, whereby each financial connection is randomly placed, reveal that increasing wealth inequality makes a wealthy network less stable—as measured by the share of individuals failing financially or the decline in financial asset values. These results introduce the idea for a unique topological role for accumulated assets and their distribution in macro-financial stability.

Chapter 3: Instability, Credit, and Inequality in the Twentieth Century The final essay studies the long-run relationship between financial instability, wealth inequality and aggregate wealth, and household debt. Specifically, it examines whether wealth inequality and aggregate wealth are contributing forces to the level of financial instability in the United States over the 20th century, or whether debt is a more crucial lever. A more traditional role for income inequality is also investigated and compared, in which its long-run increases may add to household debt and, from there, to a financial crisis. Applying a vector autoregression model, which assumes the endogeneity of the variables, and studying any cointegrating relations provides statistical validity to these relationships through rigorous specification and hypothesis testing. Results show that wealth inequality, acting in concert with the large accumulation of aggregate financial wealth, contributes significantly and positively to financial instability. A second long-run relationship is found between household debt and wealth inequality, whereby increases in financial instability are the main adjusting force back to stationary levels. Less robust evidence is found strongly linking household debt to financial instability, though income inequality does significantly contribute to debt long-term. Together, these results emphasize the important role for the distribution of accumulated wealth in the stability of the US economy.


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