Falling Behind: Has Rising Inequality Fueled the American Debt Boom?
Moritz Drechsel-Grau (moritz.drechsel-grau@gess.uni-mannheim.de) and
Fabian Greimel
CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany
Abstract:
We evaluate the hypothesis that rising inequality was a causal source of the US household debt boom since 1980. The mechanism builds on the observation that households care about their social status. To keep up with the ever richer Joneses, the middle class substitutes status-enhancing houses for status-neutral consumption. These houses are mortgage-financed, creating a debt boom across the income distribution. Using a stylized model we show analytically that aggregate debt increases as top incomes rise. In a quantitative general equilibrium model we show that Keeping up with the Joneses and rising income inequality generate 60% of the observed boom in mortgage debt and 50% of the house price boom. We compare this channel to two competing mechanisms. The Global Saving Glut hypothesis gives rise to a similar debt boom, but does not generate a house prices boom. Loosening collateral constraints does not generate booms in either debt or house prices. Finally, we provide novel empirical evidence on the relationship between top incomes and household debt. Mortgage debt rose substantially more in US states that experienced stronger growth in top incomes. There is no such relationship between top incomes and non-mortgage debt. These findings support to the importance of the comparisons channel.
Keywords: mortgages; housing boom; social comparisons; consumption networks; keeping up with the Joneses (search for similar items in EconPapers)
JEL-codes: D14 D31 E21 E44 E70 R21 (search for similar items in EconPapers)
Pages: 45
Date: 2020-11
New Economics Papers: this item is included in nep-mac and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2020_159v2
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