The impact of income inequality on household debt: A panel data analysis (1970-2021)

In this thesis, I explore to the complex relationship between income inequality and household debt. I estimate the impact of inequality on household debt using panel data from 21 developed countries over the period 1970-2021 by combining household debt with detailed income distribution data from the Standardized World Income Inequality Database and the World Income Inequality Database to construct a comprehensive dataset. By analyzing the effect of various income inequality measures on household debt, a comparison is made between the effect of the COVID-19 crisis and the effect after the 2008 crisis. Methodologically, by using the number of ratified ILO conventions as instrumental variables and the endogeneity problem is addressed using an empirical model based on it. In addition, country fixed effects and year dummies are used to control for country-specific conditions and year-varying effects. The study shows that exogenous increases in income inequality, as measured by various indicators, give rise to significant expansions in household debt. While the impact of income inequality on household debt has deepened especially after the financial crisis, the impact is less in the COVID-19 Crisis compared to the post-financial crisis period. Besides, the impact of an increase in the ratio of top income groups to middle income groups is larger than the impact of an increase in the ratio of top income groups to lower income groups.