On the Dynamic Relationship between Household Debt and Income Inequality in South Africa

Sheunesu Zhou () and Olivier Niyitegeka
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Sheunesu Zhou: Department of Economics, University of Zululand, Richards Bay 3886, South Africa
Olivier Niyitegeka: Department of Quality Assurance, Regenesys Business School, Durban 4000, South Africa

JRFM, 2023, vol. 16, issue 10, 1-17

Abstract: This paper analyses the relationship between household debt and income inequality in South Africa for the period 1980–2021. We use two measures of inequality and estimate a vector error correction model (VECM) which includes household debt, inequality, and other macroeconomic variables. To test the robustness of our results, single equation models are used, which estimate household debt as a function of inequality and macroeconomic factors. We employ two measures of inequality, namely Gini coefficient and ratio of top and bottom income earners’ proportion of income. Furthermore, we use both household debt as a percentage of disposable income and household debt service costs as dependent variables in single equation regressions. The study finds a negative and significant relationship between household debt and income inequality in the long run, which contradicts the Rajan hypothesis in the South African case. Rather, we find that inequality in South Africa creates a bias in debt allocation towards high-income earners, whose incomes can easily absorb the extra debt (reduced ratio of debt to disposable income). There are therefore no socio-equity considerations in South African credit markets. We find growth in gross domestic product (GDP) per capita also has a moderating effect on the relationship between household debt and income inequality. High GDP per capita growth in the presence of high inequality reduces the impact of inequality on household debt and vice-versa. All other control variables take expected signs. These results are robust to changes in the inequality or household debt measures.

Keywords: household debt; inequality; economic growth; South Africa; Rajan hypothesis; time series (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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