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Household Debt and Income Inequality, 1963–2003

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  • MATTEO IACOVIELLO

Abstract

I construct an economy with heterogeneous agents that mimics the time‐series behavior of the earnings distribution in the United States from 1963 to 2003. Agents face aggregate and idiosyncratic shocks and accumulate real and financial assets. I estimate the shocks that drive the model using data on income inequality, aggregate income, and measures of financial liberalization. I show how the model economy can replicate two empirical facts: the trend and cyclical behavior of household debt and the diverging patterns in consumption and wealth inequality over time. While business cycle fluctuations can account for the short‐run changes in household debt, its prolonged rise of the 1980s and the 1990s can be quantitatively explained only by the concurrent increase in income inequality.

Suggested Citation

  • Matteo Iacoviello, 2008. "Household Debt and Income Inequality, 1963–2003," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(5), pages 929-965, August.
    • Handle: RePEc:wly:jmoncb:v:40:y:2008:i:5:p:929-965
    DOI: 10.1111/j.1538-4616.2008.00142.x
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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