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Structure of Income Inequality and Household Leverage: Theory and Cross-Country Evidence

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Abstract

How does income inequality and its structure affect credit? We extend the theoretical framework by Kumhof et al. (2015) to distinguish between upper, middle and low-income classes, and show that most of the positive impact of inequality on credit predicted by Kumhof et al. (2015) should be driven by the share of total output owned by the middle classes. Consistently, this impact should weaken in countries where financial markets are insufficiently developed. These theoretical predictions are empirically confirmed by a study based on a 41-country dataset over the period 1970-2014, where exogenous variations of inequality are identified with a new instrument variable, the total number of ILO conventions signed at the country-level

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  • Rémi Bazillier & Jérôme Héricourt & Samuel Ligonnière, 2019. "Structure of Income Inequality and Household Leverage: Theory and Cross-Country Evidence," Documents de travail du Centre d'Economie de la Sorbonne 19005, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:19005
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    Cited by:

    1. Giraud, Gaël & Grasselli, Matheus, 2021. "Household debt: The missing link between inequality and secular stagnation," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 901-927.
    2. Miranda-Pinto, Jorge & Murphy, Daniel & Walsh, Kieran James & Young, Eric R., 2023. "Saving constraints, inequality, and the credit market response to fiscal stimulus," European Economic Review, Elsevier, vol. 151(C).
    3. El-Shagi, Makram & Fidrmuc, Jarko & Yamarik, Steven, 2020. "Inequality and credit growth in Russian regions," Economic Modelling, Elsevier, vol. 91(C), pages 550-558.
    4. Ying’ai Piao & Meiru Li & Hongyuan Sun & Ying Yang, 2023. "Income Inequality, Household Debt, and Consumption Growth in the United States," Sustainability, MDPI, vol. 15(5), pages 1-13, February.
    5. Vijverberg, Chu-Ping C., 2024. "Income inequality and household debt: A U.S. state-level spatial analysis," Economic Modelling, Elsevier, vol. 138(C).
    6. Ruishi Si & Yumeng Yao & Xueqian Zhang & Qian Lu & Noshaba Aziz, 2022. "Exploring the Role of Contiguous Farmland Cultivation and Adoption of No-Tillage Technology in Improving Transferees’ Income Structure: Evidence from China," Land, MDPI, vol. 11(4), pages 1-25, April.
    7. Yingwei Dong & Tirupam Goel & Emanuel Kohlscheen & Philip Wooldridge, 2025. "Keeping the momentum: how finance can continue to support growth in EMEs," BIS Papers chapters, in: Bank for International Settlements (ed.), How can central banks take account of differences across households and firms for monetary policy?, volume 127, pages 1-32, Bank for International Settlements.
    8. Yu You & Xiaoying Hu & Zongye Huang, 2024. "Macroprudential policies, capital controls, and income inequality," Review of International Economics, Wiley Blackwell, vol. 32(4), pages 1824-1867, September.
    9. Samuel Ligonnière & Salima Ouerk, 2024. "The unequal distribution of credit: Is there any role for monetary policy?," French Stata Users' Group Meetings 2024 08, Stata Users Group.
    10. El Herradi, Mehdi & Leroy, Aurélien, 2020. "Do rising top incomes fuel credit expansion?," Economics Letters, Elsevier, vol. 196(C).
    11. Cloudio Kumbirai Chikeya & Lungile Ntsalaze, 2025. "Determinants of Household Debt: A Systematic Review of the Literature," Economies, MDPI, vol. 13(3), pages 1-36, March.
    12. Koh, Sharon G. M. & Lee, Grace H. Y. & Siah, Audrey K. L., 2022. "The Resurgence of Income Inequality in Asia-Pacific: The Role of Trade Openness, Educational Attainment and Institutional Quality," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 56(3), pages 11-27.

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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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