Household Debt and Income Inequality, 1963-2003

Matteo Iacoviello ()

No 629, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: I construct an economy with heterogeneous agents that mimics the time-series behavior of the earnings distribution in the United States from 1963 to 2003. Agents face aggregate and idiosyncratic shocks and accumulate real and financial assets. I estimate the shocks that drive the model using data on income inequality, aggregate income, and 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. While business cycle fluctuations can account for the short-run changes in household debt, its prolonged rise of the 1980s and the 1990s can be quantitatively explained only by the concurrent increase in income inequality.

Keywords: Credit constraints; Incomplete Markets; Income Inequality; Household Debt (search for similar items in EconPapers)
JEL-codes: E31 E32 E44 E52 R21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ltv and nep-mac
Date: 2005-11-03, Revised 2007-10-18
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Forthcoming, Journal of Money, Credit and Banking

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Related works:
Working Paper: Household Debt and Income Inequality, 1963-2003 (2006)
Journal Article: Household Debt and Income Inequality, 1963-2003 (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:629

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