Do indebtedness, income inequality and asset dynamics affect household consumption? Evidence from 11 OECD countries

This study examines the effects of household indebtedness, income inequality, and asset dynamics on household consumption across 11 developed OECD countries from 1995 to 2021. The methodology includes a fixed effects model with Driscoll-Kraay standard errors and a panel VAR (PVAR) model with a GMM estimator. This research is the first to integrate household consumption, indebtedness, income inequality, and household assets into a single model to estimate these effects on consumption. It also investigates how income inequality impacts indebtedness. Contrary to previous findings, the analysis reveals that increases in household debt and income inequality do not necessarily reduce consumption. The expected positive impact of financial and net assets on consumption was not proven. While non-financial assets (e.g., housing) boost consumption in the short run via collateral effects, this influence turns negative over longer horizons. Moreover, the anticipated positive relationship between income inequality and household indebtedness was not confirmed.