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Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data

  • Coibion, Olivier

    (UT Austin and NBER)

  • Gorodnichenko, Yuriy

    (UC Berkeley and NBER)

  • Kudlyak, Marianna

    (Federal Reserve Bank of Richmond)

  • Mondragon, John

    (UC Berkley)

One suggested hypothesis for the dramatic rise in household borrowing that preceded the financial crisis is that low-income households increased their demand for credit to finance higher consumption expenditures in order to "keep up" with higher-income households. Using household level data on debt accumulation during 2001-2012, we show that low-income households in high-inequality regions accumulated less debt relative to income than their counterparts in lower-inequality regions, which negates the hypothesis. We argue instead that these patterns are consistent with supply-side interpretations of debt accumulation patterns during the 2000s. We present a model in which banks use applicants’ incomes, combined with local income inequality, to infer the underlying type of the applicant, so that banks ultimately channel more credit toward lower-income applicants in low-inequality regions than high-inequality regions. We confirm the predictions of the model using data on individual mortgage applications in high- and low-inequality regions over this time period.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 14-1.

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Length: 63 pages
Date of creation: 10 Jan 2014
Date of revision:
Handle: RePEc:fip:fedrwp:14-01
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