How do income inequality and fiscal consolidation impact on banking crises? A post-Keynesian view

Abstract

This is the first paper in estimating a population-averaged panel logit probability model to test the importance of the interaction between deficit in the public budgeting and income inequality on banking crises, for 36 developed countries from 1961-2011. New empirical evidence is shown on whether rising inequality is linked with financial crises, corroborating theoretical expectations of post-Keynesian authors. Policy measures are provided and tested empirically: whilst in general terms higher levels of income inequality could be associated with financial crises; countries with high levels could reduce the likelihood of a crisis better in a context of fiscal consolidation. One reason could be that governments could use this public surplus for reducing income inequality, which helps to reduce defaults and banking crises. These results could be useful for academics, and policy-makers.