System Working Paper 17-04

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

Olivier Coibion | University of Texas at Austin and NBER
Yuriy Gorodnichenko | University of California, Berkeley and NBER
Marianna Kudlyak | Federal Reserve Bank of San Francisco
John Mondragon | Northwestern University

Published January 18, 2017

Using household-level debt data over 2000-2012 and local variation in inequality, we show that low-income households in high-inequality regions (zip-codes, counties, states) accumulated less debt (relative to their income) than low-income households in lower-inequality regions, contrary to the prevailing view. Furthermore, the price of credit is higher and access to credit is harder for low-income households in high-inequality versus low-inequality regions. Lower quantities combined with higher prices suggest that the debt accumulation pattern by household income across areas with different inequality is a result of credit supply rather than credit demand. We propose a lending model to illustrate the mechanism.

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