Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data

63 Pages Posted: 1 Feb 2014

See all articles by Olivier Coibion

Olivier Coibion

University of Texas at Austin

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Marianna Kudlyak

Federal Reserve Bank of San Francisco

John Mondragon

Northwestern University

Multiple version iconThere are 3 versions of this paper

Abstract

One suggested hypothesis for the dramatic rise in household borrowing that preceded the financial crisis is that low-income households increased their demand for credit to finance higher consumption expenditures in order to "keep up" with higherincome households. Using household level data on debt accumulation during 2001-2012, we show that low-income households in high-inequality regions accumulated less debt relative to income than their counterparts in lower-inequality regions, which negates the hypothesis. We argue instead that these patterns are consistent with supply-side interpretations of debt accumulation patterns during the 2000s. We present a model in which banks use applicants' incomes, combined with local income inequality, to infer the underlying type of the applicant, so that banks ultimately channel more credit toward lower-income applicants in low-inequality regions than high-inequality regions. We confirm the predictions of the model using data on individual mortgage applications in high- and low-inequality regions over this time period.

Keywords: inequality, household debt, Great Recession

JEL Classification: E21, E51, D14, G21

Suggested Citation

Coibion, Olivier and Gorodnichenko, Yuriy and Kudlyak, Marianna and Mondragon, John, Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data. IZA Discussion Paper No. 7910, Available at SSRN: https://ssrn.com/abstract=2389258

Olivier Coibion (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://www.econ.berkeley.edu/~ygorodni/index.htm

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Marianna Kudlyak

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

John Mondragon

Northwestern University ( email )

Evanston, IL 60208
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
35
Abstract Views
651
PlumX Metrics