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

System Working Paper 17-04 | Published January 18, 2017

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Authors

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

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

Abstract

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.