Income inequality and household debt: a cointegration test

Abstract

This article employs the Johansen and Engle–Granger methodology to determine if there is a cointegrating relationship between household debt and income inequality as measured by Atkinson, Piketty and Saez (2011). The results suggest a cointegrating relationship between the two series. A vector error correction model is estimated showing that a shock to household debt has statistically significant effects on income inequality in the United States over the time period 1919–2009.

Keywords:

• income inequality
• household debt
• cointegration

JEL Classification:

• D31
• D30

Notes

¹ This was true using either a trend in the model or restricting it to only the cointegrating vector.

² Two specifications were used for the cointegrating vector. One took the vector estimated directly from the Johansen test, the other used OLS to estimate the cointegrating relationship. Results from both were nearly identical.