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Household Debt and Income Inequality, 1963-2003

  • Matteo Iacoviello

    ()

    (Boston College)

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.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 629.

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Date of creation: 03 Nov 2005
Date of revision: 18 Oct 2007
Publication status: forthcoming, Journal of Money, Credit and Banking
Handle: RePEc:boc:bocoec:629
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