Economics Brown Bag Seminar Series – Faisal Sohail (The University of Melbourne)

Room 605, Level 6, FBE Building, 111 Barry Street, Carlton

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Faisal Sohail and Aaron Barkley

Title: Finance and Inequality: A Tale of Two Tails, with A. Ludwig, A. Monge-Naranjo, C. Slavik

Abstract: This paper estimates the effects of the U.S. financial markets' deregulations on the country's distribution of income. We find that different reforms moved inequality in opposite directions. The removal of bank branching restrictions and the elimination of ceilings on interest rates in the 1970s and 1980s decreased inequality. These reforms mostly enhanced incomes of workers in the lower tail of the income distribution. On the contrary, the 1999 repeal of the Glass-Steagall Act increased inequality. This reform substantially increased incomes of workers in the upper tail of the distribution. To explore the underlying mechanisms, we examine 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: they would imply similar responses to all reforms. We construct a model that endogenously generates household heterogeneity in choices of financial products and captures heterogenous income responses to different deregulations. The model explains how the different deregulations impacted the opposite tails of the income distribution.