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Title: Finance and Inequality: A Tale of Two Tails

Citation Type: Miscellaneous

Publication Year: 2019

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Abstract: This paper estimates the effects of U.S. financial markets’ deregulations on the country’s distribution of income. We find that different reforms have moved inequality in opposite directions. The removal of intra- and inter-state branching restrictions and the elimination of ceilings on interest rates in the 1970s and 1980s decreased inequality. These reforms mostly enhanced the incomes of workers in the lower tail of the in- come distribution. On the contrary, the 1999 repeal of the Glass-Steagal Act increased inequality. This reform substantially increased incomes of workers in the upper tail of the distribution. To explore the underlying mechanisms, we examine the responses within and across groups of workers, including finance versus non-finance workers. Our findings indicate that models based solely on capital skill complementarities (CSC) are insufficient because they would imply similar responses to all reforms. We construct a model that endogenously generate household heterogeneity in the and choices of financial products and captures the heterogenous income responses to different dereg- ulations. The model naturally explains how the different deregulations impacted the opposite tails of the income distribution.

Url: http://home.cerge-ei.cz/slavik/paper/LMSS2019.pdf

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Authors: Ludwig, Alexander; Monge-Naranjo, Alexander; Slav ́ık, Ctirad; Sohail, Faisal

Publisher: Federal Reserve Bank of St. Louis

Data Collections: IPUMS CPS

Topics: Other

Countries: United States