The Effects of Financial Crises on Income Inequality: Evidence in the Long Run of History

Using a panel of 24 countries, this paper empirically examines the long-run relationship between financial crises and income inequality. Financial crises are subdivided into banking crises, currency crises and twin crises. The time period covered is separated into three subperiods: the pre-World War 1 period (1880–1913); the Interwar period (1920–1939); and the post-World War 2 period (1950–2012). Banking crises and twin crises have an increasing effect on income inequality in the pre-World War 1 and post-World War 2 periods, but are associated with narrowing income inequality in the Interwar period. Currency crises increase inequality in the first two periods under analysis, but decrease top incomes in the years 1950- 2012. In addition, evidence is supporting the theoretically proposed mechanisms (the availability of credit to the corporate sector, the price of household credit and the terms of trade) through which banking and currency crises affect the income distribution.