Household Debt, Consumption and Inequality

This paper examines the link between household credit shocks, consumption and income inequality at the national level. Empirically, we use country-specii¬ c VAR models to estimate the dynamic responses of aggregate consumption to household credit shocks. We then show in cross-country regressions that the consumption response is more sensitive to such shocks in countries with higher levels of inequality, even after controlling for i¬ nancial development. Theoretically, we construct and simulate a dynamic model based on the ei¬€ect of inequality on the incidence of credit constraints, to illustrate potential causal mechanisms.