Falling Behind: Has Rising Inequality Fueled the American Debt Boom?

Main event: WIFO Research Seminar
Organised by: Austrian Institute of Economic Research
Persons: Fabian Greimel
Österreichisches Institut für Wirtschaftsforschung
This paper studies whether the interplay of social comparisons in housing and rising income inequality contributed to the household debt boom in the USA between 1980 and 2007. We develop a tractable macroeconomic model with general social comparisons in housing to show that changes in the distribution of income affect aggregate housing demand, aggregate debt and house prices if (and only if) social comparisons are asymmetric. In the empirically relevant case of upward-looking comparisons, rising inequality can rationalize up to a quarter of the observed debt boom.