The Impact of Income Inequality on Household Indebtedness in Euro Area Countries (original) (raw)

Macroeconomic implications of inequality and household debt: European evidence

Finance, Growth and Inequality, 2019

A growing recent literature has examined the macroeconomic implications of household debt. Recent analysis has linked household debt to rising inequality across developed economies leading to stagnant or declining real incomes for middle and lower income households. Wages stagnated with their decoupling from productivity growth and rising inequality; households maintained consumption with falling savings and rising indebtedness. This consumption behaviour can be understood in terms of emulation of consumption patterns through a relative income effect. A range of authors have argued household debt was central to the global financial crisis. More generally it has been argued that with rising inequality aggregate demand was only been sustained by this process of rising household indebtedness before the crisis and since then recovery has been held back by limited growth in household incomes and such recovery as has been achieved has generated by renewed rises in household debt.

Income Inequality in the Over-Indebted Eurozone Countries and the Role of the Excessive Deficit Procedure

Open Economies Review

The present study identifies economic, political, and institutional variables that influence the distribution of personal incomes in the Eurozone countries facing severe fiscal imbalances, namely Greece, Italy, Portugal, and Spain. Crucially, this paper is the first to investigate the effect of the corrective arm of the Stability and Growth Pact, the so-called Excessive Deficit Procedure (EDP), on the income distribution of the aforementioned economies, where EDP was imposed over a long time period. The empirical results of this study show that (i) EDP impact depends on the specific mix of policy measures undertaken and that (ii) a high public debt does not reflect the existence of common factors shaping income distribution in the four Southern European economies. The share of labor income in total income, constitutes a significant determinant of income inequality. However, we find that the relationship between labor share and income inequality is also country-specific, depending on the intrinsic characteristics of each individual economic system.

Household finance and income inequality in the euro area

Household finance and income inequality in the euro area The size and composition of assets and liabilities of households differ vastly across the income distribution in euro area countries. This paper shows that differences between income groups in household finance on both sides of the balance sheet contribute to income inequality. The distribution of household credit is two times as unequal and the distribution of stock market wealth four times as unequal as the distribution of household income. Larger credit and stock markets may thus widen income inequality by providing people with high incomes with better investment opportunities and raising the returns on their savings. In addition, financial institutions help people protect their consumption against temporary changes in their income. But they do so unevenly across the distribution, as a household is more likely to be denied credit if it has a low income. No evidence is found of discrimination in credit provision against women or immigrants. Financement des ménages et inégalités de revenu dans la zone euro La taille et la composition de l’actif et du passif des ménages sont très variables sur la distribution des revenus dans les pays de la zone euro. Ce document montre que les différences entre quintiles de revenu dans le financement des ménages, de part et d’autre du bilan, contribuent aux inégalités de revenu. La distribution du crédit aux ménages est deux fois plus inégale et la distribution du patrimoine boursier quatre fois plus inégale que la distribution des revenus des ménages. L’expansion des marchés du crédit et d’actions pourrait ainsi contribuer aux inégalités de revenu en offrant aux plus hauts revenus de meilleures possibilités d’investissement et une meilleure rentabilité de leur épargne. Par ailleurs, les établissements financiers aident les ménages à protéger leur consommation en période de fluctuations temporaires de leur revenu. Or, ils le font de manière inégale sur la distribution des revenus puisqu’un ménage a plus de risques de se voir opposer un refus si ses revenus sont faibles. Aucun élément ne vient corroborer l’idée d’une discrimination de l’offre de crédit à l’encontre des femmes ou des personnes issues de l’immigration.

Net Wealth across the Euro Area - Why Household Structure Matters and How to Control for It

2014

We study the link between household structure and cross country differences in the wealth distribution using a recently compiled data set for the euro area (HFCS). We estimate counterfactual distributions using non-parametric re-weighting to examine the extent to which differences in the unconditional distributions of wealth across euro area countries can be explained by differences in household structure. We find that imposing a common household structure has strong effects on both the full unconditional distributions as well as its mappings to different inequality measures. For the median 50% of the differences are explained for Austria, 15% for Germany, 25% for Italy, 14% for Spain and 38% for Malta. For others as Belgium, France, Greece, Luxembourg, Portugal, Slovenia and Slovakia household structure masks the differences to the euro area median and Finland and the Netherlands change their position from below to above the euro area median. The impact on the mean and percentile r...

Debt Shift, Financial Development and Income Inequality in Europe

SOM Research Reports, 2016

Does financial development increase income inequality? Ambiguous answers to this question to date may be due to over-aggregation. In data over 1990–2012 for 26 EU economies, we study the effects on income inequality of different components of financial development. We find that bank credit to real estate and financial asset markets, which increases the wage share of the Finance, Insurance and Real Estate (FIRE) sector, increases income inequality. Credit to non-financial business and for household consumption supports broader income formation, decreasing income inequality. There was a large shift of bank credit allocation since the 1990s, away from supporting investments by non-financial firms and towards financing capital gains in real estate and financial asset markets. Combined with our new findings, this ’debt shift’ helps to understand the growth of inequality.

Can Income Inequality Affects Household Debt?

International Journal of Academic Research in Business and Social Sciences

The present study aims to evaluate the influence of income inequality on household debt by applying the dynamic GMM estimator to a database covering advanced and emerging countries over the period 1994 to 2019. The result shows that income inequality promotes the growth of household debt. Furthermore, higher house prices and financial development increase the household debt. Meanwhile, the economic growth, interest rate and unemployment have negative and significant effect on household debt. The finding of the study suggests the involved authorities formulate suitable policies and initiatives in order to monitor the increase in household debt. Indirectly, this measure can be useful to consider as an early warning signal for crises.

The Impact of selected Economic Determinants on Income Inequality: The case of the EU

The EU 2020 Strategy aims at achieving an inclusive and sustainable growth in the EU. Hence, the analyses of the impact of certain economic determinants on income inequality, which are characteristic to some EU member states like private sector debt or tax from low wages in the context of austerity measures, become important. The paper investigates the determinants of Income Inequality in the EU in terms of gdp growth, private sector debt, social benefits, unemployment and tax from low wages. Social benefits include items such as allowances for sickness, maternity, care of dependents and family, whereas unemployment is handled as a separate economic determinant. To this end, panel data of 27 EU countries for the period of 2004-2014 are employed, where Gini coefficient is the dependent variable. Our analysis point out to social benefits and unemployment as the economic determinants of income inequality in the EU between 2004 and 2014. Income inequality increases as unemployment increases and as social benefits decreases. Yet gdp growth, private sector debt and tax from low wages do not have an Impact on the income inequality in the EU member states.

The Distribution of Debt Across Euro Area Countries: The Role of Individual Characteristics, Institutions and Credit Conditions

SSRN Electronic Journal, 2000

The aim of this paper is twofold. First, we present an up-to-date assessment of the differences across euro area countries in the distributions of various measures of debt conditional on household characteristics. We consider three different outcomes: the probability of holding debt, the amount of debt held and, in the case of secured debt, the interest rate paid on the main mortgage. Second, we examine the role of legal and economic institutions in accounting for these differences. We use data from the first wave of a new survey of household finances, the Household Finance and Consumption Survey, to achieve these aims. We find that the patterns of secured and unsecured debt outcomes vary markedly across countries. Among all the institutions considered, the length of asset repossession periods best accounts for the features of the distribution of secured debt. In countries with longer repossession periods, the fraction of people who borrow is smaller, the youngest group of households borrow lower amounts (conditional on borrowing), and the mortgage interest rates paid by low-income households are higher. Regulatory loan-to-value ratios, the taxation of mortgages and the prevalence of interest-only or fixed-rate mortgages deliver less robust results.

The drivers of household indebtedness reconsidered: An empirical evaluation of competing arguments on the macroeconomic determinants of household indebtedness in OECD countries

Journal of Post Keynesian Economics

Household debt is at a record high in most OECD countries and it played a crucial role in the recent financial crisis. Several arguments on the macroeconomic drivers of household debt have been put forward, and most have been empirically tested, albeit in isolation of each other. This paper empirically tests seven competing hypotheses on the macroeconomic determinants of household indebtedness together in one econometric study. Existing arguments suggest that residential house prices, upward movements in the prices of assets demanded by households, the income share of the top 1%, falling wages, the rolling back of the welfare state, the age structure of the population and the short-term interest rate drive household indebtedness. We formulate these arguments as hypotheses and test them for a panel of 13 OECD countries over the period 1993-2011 using error correction models. We also investigate whether effects differ in boom and bust phases of the debt and house price cycles. The results show that the most robust macroeconomic determinant of household debt is real residential house prices, and that the phase of the debt and house price cycles plays a role in household debt accumulation.