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Does Income Gap Matter for Household Debt Accumulation?

Author

Listed:
  • Mohd Afzanizam Abdul Rashid

    () (Faculty of Economics and Management, Universiti Kebangsaan Malaysia)

  • Tamat Sarmidi

    () (Faculty of Economics and Management, Universiti Kebangsaan Malaysia)

  • Abu Hassan Shaari Md Nor

    () (Faculty of Economics and Management, Universiti Kebangsaan Malaysia)

  • Nor Ghani Md Noor

    () (Faculty of Economics and Management, Universiti Kebangsaan Malaysia)

Abstract

The rise in household debt raises the question: what really causes people to take on more debt when they have to serve the cost of borrowings for the rest of their lives? It appears that households are willing to trade their financial freedom for something that is more precious at a time when the gap between the rich and the poor is widening. In this regards, our main objective is to investigate the relationship between household debt and income gap. The understanding of this issue may give good insights as to how household would make decisions to leverage their balance sheet. This is particularly true in the context of “keeping up with the Jones’s” which provides the theoretical framework of such phenomenon while greater access to credit would facilitate the process. In this research, the Generalized Methods of Moments (GMM) technique is employed for 55 countries and covers the period from 2000 to 2012. The results showed that there is a significant positive relationship between income gap and household debt. In addition, the level of indebtedness is deemed to be persistent throughout our sample countries, suggesting that households will remain in debt-trap.

Suggested Citation

  • Mohd Afzanizam Abdul Rashid & Tamat Sarmidi & Abu Hassan Shaari Md Nor & Nor Ghani Md Noor, 2017. "Does Income Gap Matter for Household Debt Accumulation?," Institutions and Economies (formerly known as International Journal of Institutions and Economies), Faculty of Economics and Administration, University of Malaya, vol. 9(1), pages 1-19, January.
  • Handle: RePEc:umk:journl:v:9:y:2017:i:1:p:1-19
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    More about this item

    Keywords

    Conspicuous; consumption and social interactions; credit ratio; household debt; income gap;

    JEL classification:

    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy

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