Household debt, expected economic conditions, and income inequality

Abstract

The high level of debt among households outside the top end of the income distribution has led many economists to assert that household debt has been an important component of the increase in income inequality in the United States. In addition, the yield spread provides information about the overall condition of the economy and may also be tied into the distribution of income. The paper's results show that increases in the yield spread and household debt correspond with increases in top income shares, resulting in increases in income inequality. However, as household debt and income inequality increase, the yield spread contracts, which suggests future economic contraction. Thus, rising inequality may signal future economic weakness.

Time-varying predictability of financial stress on inequality in United Kingdom

“…(2017). Given that developments in overall economic conditions and monetary policy is likely to affect both income (consumption) inequality and financial conditions (Berisha, 2017; Berisha and Meszaros, 2018; Berisha et al. , 2018), we use real gross domestic product (GDP) for the UK to capture current economic conditions, and real interest rate (nominal three-month treasury bill rate less the consumer price index (CPI)-based inflation rate) as a measure of the stance of monetary policy, as additional controls in our VAR model as part of robustness checks [4].…”

Research review for effects of investment on polarization of wealth

“…While some kinds of inequality, caused by differential rewards to effort, might be associated with faster economic growth, other kinds, arising from unequal opportunities for investment, might be detrimental to economic progress [ 15 ]. The high level of debt among households outside the top end of the income distribution has led many economists to assert that household debt has been an important component of the increase in income inequality in the United States [ 16 ]. A virtuous cycle of credits, a shorter technological gap, less inequality, and economic growth is feasible to be created when there is full liquidity in the market [ 17 ].…”

Is Rajan’s Hypothesis Confirmed by Empirical Evidence? A Critical Review

“…We first investigate empirical studies that focus on the experience of the United States. We find ten relevant papers (Christen and Morgan 2005; Boushey and Weller 2008; Berisha, Meszaros, and Olson 2015; Yamarika, El-Shagi, and Yamashiro 2016; Berisha and Meszaros 2017; Fasianos, Raza, and Kinsella 2017; Berisha and Meszaros 2018; Thompson 2018; De Stefani 2020; Coibion et al 2020). If we adopt a loose standard, it can be argued that all ten papers attempt to test Rajan’s theory, and most of them (seven out of ten papers) confirm Rajan’s argument that income inequality exerts a positive effect on household debt.…”

“…If we adopt a loose standard, it can be argued that all ten papers attempt to test Rajan’s theory, and most of them (seven out of ten papers) confirm Rajan’s argument that income inequality exerts a positive effect on household debt. Among the remaining three papers, two report a reverse relationship (i.e., household debt impacts income inequality) (Berisha and Meszaros 2017, 2018), and the other finds that low-income households accumulate less debt when inequality increases (Coibion et al 2020).…”