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Household Debt and Income Inequality, 1963-2003

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  • Matteo Iacoviello

    () (Economics Boston College)

Abstract

I construct a heterogeneous agents economy that mimics the time-series behavior of the US earnings distribution from 1963 to 2003. Agents face aggregate and idiosyncratic shocks and accumulate real and financial assets. I estimate the shocks driving the model using data on income inequality, on aggregate income and on 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. In particular, I show that, while short-run changes in household debt can be accounted for by aggregate fluctuations, the rise in household debt of the 1980s and the 1990s can be quantitatively explained only by the concurrent increase in income inequality

Suggested Citation

  • Matteo Iacoviello, 2006. "Household Debt and Income Inequality, 1963-2003," 2006 Meeting Papers 585, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:585
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    References listed on IDEAS

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    More about this item

    Keywords

    Household Debt; Income Inequality; Incomplete Markets; Borrowing Constraints;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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