The author thanks two anonymous referees, Zvi Hercowitz, Dirk Krueger, José Víctor Ríos Rull, and Mirko Wiederholt, as well as seminar and conference participants for suggestions that improved the paper. Part of this research was conducted at the European Central Bank as part of the ECB Research Visitor Programme; the author would like to thank the ECB for hospitality and support.
Household Debt and Income Inequality, 1963–2003
Article first published online: 19 JUL 2008
© 2008 The Ohio State University
Journal of Money, Credit and Banking
Volume 40, Issue 5, pages 929–965, August 2008
How to Cite
IACOVIELLO, M. (2008), Household Debt and Income Inequality, 1963–2003. Journal of Money, Credit and Banking, 40: 929–965. doi: 10.1111/j.1538-4616.2008.00142.x
- Issue published online: 19 JUL 2008
- Article first published online: 19 JUL 2008
- Received November 4, 2006; and accepted in revised form November 5, 2007.
- income inequality;
- household debt;
- credit constraints;
- incomplete markets
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.