Macroeconomic implications of inequality and household debt: European evidence

Abstract

A growing recent literature has examined the macroeconomic implications of household debt. Recent analysis has linked household debt to rising inequality across developed economies leading to stagnant or declining real incomes for middle and lower income households. Wages stagnated with their decoupling from productivity growth and rising inequality; households maintained consumption with falling savings and rising indebtedness. This consumption behaviour can be understood in terms of emulation of consumption patterns through a relative income effect. A range of authors have argued household debt was central to the global financial crisis. More generally it has been argued that with rising inequality aggregate demand was only been sustained by this process of rising household indebtedness before the crisis and since then recovery has been held back by limited growth in household incomes and such recovery as has been achieved has generated by renewed rises in household debt.