Structure of Income Inequality and Household Leverage: Theory and Cross-Country Evidence
Remi Bazillier (),
Jérôme Héricourt () and
Working Papers from CEPII research center
How do income inequality and its structure affect the volume of credit? We extend the theoretical framework by Kumhof et al. (2015) to distinguish between upper, middle and low-income classes, and show that most of the positive impact of inequality on credit predicted by Kumhof et al. (2015) should be driven by the share of total output owned by middle classes. These theoretical predictions are empirically confirmed by a study based on a 44 countries dataset over the period 1970-2012. Exogenous variations of inequality are identified with a new instrument variable, the total number of International Labor Organization conventions signed at the country-level. Using various indicators of inequality, we support a positive impact of inequality concentrated on household leverage, and investigate how this average impact is distorted along income distribution. Consistently with the theoretical setting, our results tend to show that most of the impact is driven by middle classes, rather than low-income households. Consistently, our results hold mostly for developed countries.
Keywords: Credit; Finance; Income Inequality; Inequality structure (search for similar items in EconPapers)
JEL-codes: D31 E25 E44 G01 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepidt:2017-01
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