Summary
Motivation
Do financial crises affect everyone equality? 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
Generalised method of moments (GMM)
Findings
Any type of financial crisis results in a larger income gap between the rich and the poor. It is noteworthy that while 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 emerging/developing countries are more pronounced than in developed countries.
Policy implications
Long- and medium-term plans for social assistance programmes in emerging/developing countries 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 implement 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.