Inequality and household debt: a panel cointegration analysis

This study investigates whether there exists an empirical long-run relationship between income inequality and household debt. By using panel cointegration techniques, I find that inequality and leverage are cointegrated of order one and therefore share a common trending relation. Removing this trend by first differencing the series leads to biased inference. The results are robust to different indicators for household debt and alternative inequality measures. In the long run, a 1 percent point increase in inequality is associated with an increase in household credit by 2 to 6 percent, depending on the inequality measure used.