Income Inequality and Household Debt : A panel data study of 17 OECD-countries from 1995-2015

Sammanfattning: This study explores the relationship between income inequality and household indebtedness using panel data on 17 OECD-countries over the time period 1995-2015. Motivated by relative income theory of consumption and previous empirical research we anticipate a non-monotonic relationship between changes in household debt and income inequality (measured by the Gini- coefficient), as dynamics between different groups of households in the income spread is expected to vary at different levels of inequality. Carrying out the empirical analysis we find notable indications of an inverse U-shape relationship between inequality levels and household borrowing. We locate an estimated turning point at a Gini-value of 28.84, which indicates a positive marginal effect on household borrowing as inequality grows from levels below this point, turning negative as inequality increases further. This suggests that as income inequality grows from relatively low levels households increase their rate of borrowing, while at higher levels of inequality households decrease their borrowing rate in response to growing income disparities. Results hold under a random effects model and a pooled OLS model, but fail to prove significant in the stricter fixed effects model, why we cannot draw any definitive conclusions about the magnitude of the effect. Nevertheless, the findings of further complimentary estimations lend credence to our hypothesis. Benefits and limitations of our data and empirical methods are comprehensively discussed, as well as the theoretical mechanisms explaining the relationship. Indicative but in the end inconclusive results leaves ample opportunity for further investigations with more advanced empirical methods.