Keeping up with the Joneses, the neighbors and the richest - Can time-varying keeping up parameters explain the relationship between income inequality and household debt?

Sammanfattning: Many OECD countries have experienced a large increase in household debt during the last two decades. Simultaneously, income inequality has risen in most of the western world. This trend has been particularly notable in the US. Evidence from PSID and SCF shows that it is the lower income households that have had the largest increase in debt-to-income in this period. We suggest that the increase in household debt among the lower income households can be explained by a keeping up effect, i.e. that households compare their consumption relative to the consumption of others. We have tested this effect in a life-cycle model with three different alterations and conclude that it is plausible that there is a relationship between income inequality and the increase in debt-to-income for the lower income households.