The relationship between inequality and bank credit in Australia

This paper examines the relationship between economic inequality and expansions of bank credit in Australia throughout recent decades. This relationship is a central component of what has become colloquially known as the “Rajan hypothesis†and more technically referred to as the “inequality, credit, crisis nexus†. The findings of the paper suggest that although there is a strong positive relationship between inequality and expansions of bank credit in Australia at the most aggregated level (consistent with international studies of the phenomenon in which Australia was included in panel data), when the types of loans are examined in more detail, their correlation with inequality is not consistent with the belief that credit is channelled specifically to low income households as inequality worsens (as is suggested by the Rajan hypothesis). There are multiple ways in which the Australian case differs from the American which may contribute to the differing results, some of which include a lower levels of income inequality, more progressive taxation policy which reduces consumption inequality, and stricter macroprudential policy which resulted in fewer subprime loans.