Distributional issues have gained prominence in public debates since the global financial crisis. Many have increasingly become concerned about the potential adverse impact of the recent financial upheaval on inequality amid stagnant income growth.

What is the distributional consequence of a financial crisis? Is the impact of a financial crisis on income inequality different from a normal recession or other financial market event such as major stock market crash? Does monetary and fiscal policy space prior to a crisis explain cross-country variation in the severity of the distributional impact? What are the main channels through which a financial crisis likely affects inequality?

This paper investigates the income inequality impact of financial crises in a panel of 17 advanced economies for 1955-2016. Specifically, we adopt the Jorda (2005 AER) local projection method to estimate the impulse response function of inequality to financial crises using a fixed effects panel regression (complemented by using system GMM). We provide extensive evidence regarding the effects on indicators of income inequality of systemic and non-systemic financial crises, financial crisis-induced recessions and non-financial recessions, and major stock market crashes. We consider Gini coefficients based on market income (before taxes and transfers) and net income (after taxes and transfers), size of redistribution, labor income share, and top 1 percent and 10 percent income shares. Data on Gini coefficients and redistribution are from the Standardized World Income Inequality Database. Labor income share is from the Penn World Table 9.0, and top income shares are from the World Inequality Database.

Preliminary results suggest that the adverse inequality impact of systemic financial crises is statistically significant and persistent over time. The Gini coefficient of market income rises significantly over the 4 years after the crisis, and thereafter declines slowly. However, the estimated response of the net income Gini is not significantly different from zero. The contrasting behavior is explained by the redistribution response. Consistent with market income inequality, labor income share declined statistically significantly in the aftermath of the crisis, indicating a worsening in inequality. By contrast, top income shares initially fell, but rose back above the before-crisis level around year 8 (statistically significant). In terms of operating channels, labor market (e.g., unemployment), asset prices, and public finance are found to be important with different implications. The fiscal and monetary policy space prior to the crisis is expected to affect inequality in the aftermath of the crisis.