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Modigliani Meets Minsky: Inequality, Debt, and Financial Fragility in America, 1950-2016

Author

Listed:
  • Alina K. Bartscher

    (University of Bonn)

  • Moritz Kuhn

    (University of Bonn)

  • Moritz Schularick

    (University of Bonn)

  • Ulrike I. Steins

    (University of Bonn)

Abstract

This paper studies the secular increase in U.S. household debt and its relation to growing income inequality and financial fragility. We exploit a new household-level dataset that covers the joint distributions of debt, income, and wealth in the United States over the past seven decades. The data show that increased borrowing by middle-class families with low income growth played a central role in rising indebtedness. Debt-to-income ratios have risen most dramatically for households between the 50th and 90th percentiles of the income distribution. While their income growth was low, middle-class families borrowed against the sizable housing wealth gains from rising home prices. Home equity borrowing accounts for about half of the increase in U.S. household debt between the 1970s and 2007. The resulting debt increase made balance sheets more sensitive to income and house price fluctuations and turned the American middle class into the epicenter of growing financial fragility.

Suggested Citation

  • Alina K. Bartscher & Moritz Kuhn & Moritz Schularick & Ulrike I. Steins, 2020. "Modigliani Meets Minsky: Inequality, Debt, and Financial Fragility in America, 1950-2016," Working Papers Series inetwp124, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:inetwp124
    DOI: 10.36687/inetwp124
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    File URL: https://doi.org/10.36687/inetwp124
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    Cited by:

    1. Fierro, Luca Eduardo & Giri, Federico & Russo, Alberto, 2023. "Inequality-constrained monetary policy in a financialized economy," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 366-385.
    2. Bazillier, Rémi & Héricourt, Jérôme & Ligonnière, Samuel, 2021. "Structure of income inequality and household leverage: Cross-country causal evidence," European Economic Review, Elsevier, vol. 132(C).
    3. Andreas Fagereng & Magnus A. H. Gulbrandsen & Martin B. Holm & Gisle J. Natvik, 2021. "How does monetary policy affect household indebtedness?," Working Paper 2021/5, Norges Bank.
    4. Gianni La Cava & Lydia Wang, 2021. "The Rise in Household Liquidity," RBA Research Discussion Papers rdp2021-10, Reserve Bank of Australia.
    5. Alina K. Bartscher & Moritz Kuhn & Moritz Schularick & Paul Wachtel, 2022. "Monetary Policy and Racial Inequality," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 53(1 (Spring), pages 1-63.
    6. Luis Bauluz & Filip Novokmet & Moritz Schularick, 2022. "The Anatomy of the Global Saving Glut," Working Papers halshs-03693216, HAL.
    7. Atif Mian & Ludwig Straub & Amir Sufi, 2021. "What explains the decline in r ∗ ? Rising income inequality versus demographic shifts," Working Papers 2021-12, Princeton University. Economics Department..
    8. Chen, Chuanglian & Liu, Xiaobin & Yu, Jun & Zeng, Tao, 2025. "The time-varying zone-like and asymmetric preference of central banks: Evidence from China," China Economic Review, Elsevier, vol. 94(PA).
    9. von Schweinitz, Gregor, 2023. "The importance of credit demand for business cycle dynamics," IWH Discussion Papers 21/2023, Halle Institute for Economic Research (IWH).
    10. Sevim Kösem, 2021. "Income inequality, mortgage debt and house prices," Bank of England working papers 921, Bank of England.
    11. Wang, Shengquan, 2023. "Income inequality and systemic banking crises: A nonlinear nexus," Economic Systems, Elsevier, vol. 47(4).

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    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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