Household Debt, Consumption, and Income Inequality

ABSTRACT

Using the Johansen and Engle–Granger cointegration tests, we show that there is one cointegrating relationship between household debt, consumption, and income inequality in the United States for the period from 1929 to 2009. Given this result, we use a Vector Error-Correction model to further understand the dynamics among the three variables. Results indicate that increases in income inequality and consumption directly contribute to increases in household debt. Interestingly, the results reveal some feedback from household debt to income inequality. We also show that debt-driven consumption should be viewed with caution as the results show that increases in household debt correspond with future declines in the rate of consumption.

KEYWORDS:

• Income inequality
• consumption
• household debt
• VECM

Acknowledgments

This research was prepared by the author (John Meszaros) in his personal capacity. The opinions expressed in this article are the author’s own and do not necessarily reflect the views of the United States Postal Service or the United States government.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The data was also analysed in Berisha et al. (2018) and Berisha and Meszaros (2017) while investigating related but different topics.

2 Similar modelling techniques were used in Berisha et al. (2018) and Berisha (2017).