Income inequality and banking crises: Testing the level hypothesis directly

Abstract

We perform an empirical analysis to investigate the relationship between income inequality and the occurrence of banking crises on a panel of 33 advanced countries in the period 1970–2011. Differently from other empirical studies, we focus on levels rather than growth rates of income inequality. We find a statistically significant and positive relationship between the value of the Gini index and the probability of banking crises. This result is confirmed when income distribution is summarized by the top 1% income share.