Financialization, household debt and income inequality: Empirical evidence

Abstract

The aftermath of the most recent financial crisis has prompted a surge of interest in the impact of finance capitalism on national economies and individual livelihoods. Yet, research on the impact of financialization on income inequality, remains scant and inconclusive. Using data for 33 countries over 1996–2015, we provide evidence that of the three financialization dimensions ‐ of the financial, nonfinancial and household sectors ‐ only household financialization exerts a positive and robustly significant impact on income inequality. Re‐estimations by system generalized‐methods‐of‐moments (SYS‐GMM) and difference‐GMM as well as alternative income inequality measures, confirm the significant, positive impact of household indebtedness over all other financialization dimensions. Following disaggregation of household financialization into its three main components (mortgage, consumer and other purposes debt), we also uncover that it is increasing levels of household debt aimed at sustaining living standards that is accountable for the positive impact on income inequality, whilst mortgage debt reduces it.

Is Rajan’s Hypothesis Confirmed by Empirical Evidence? A Critical Review

“…We find fourteen papers that explore the inequality-credit nexus on a cross-country level (Rubaszek and Serwa 2014; Klein 2015; Malinen 2016; Ahlquist and Ansell 2017; Moore and Stockhammer 2018; Stockhammer and Wildauer 2018; Fischer, Huerta, and Valenzuela 2019; Gu et al 2019; Latinovic and Milosevic 2019; Lim 2019; Chang et al 2020; Herradi and Leroy 2020; Bazillier, Héricourt, and Ligonnière 2021; De Vita and Luo 2021). Even if we apply the loose standard, we find only five papers that confirm the positive impact of income inequality on household debt (Klein 2015; Gu et al 2019; Chang et al 2020; Herradi and Leroy 2020; Bazillier, Héricourt, and Ligonnière 2021).…”

“…Even if we apply the loose standard, we find only five papers that confirm the positive impact of income inequality on household debt (Klein 2015; Gu et al 2019; Chang et al 2020; Herradi and Leroy 2020; Bazillier, Héricourt, and Ligonnière 2021). Other studies either find a bidirectional causality between household debt and inequality (De Vita and Luo 2021), fail to find a robust relationship between inequality and household indebtedness (Rubaszek and Serwa 2014; Malinen 2016; Moore and Stockhammer 2018; Stockhammer and Wildauer 2018), or report that the relationship is condition dependent (Ahlquist and Ansell 2017; Fischer, Huerta, and Valenzuela 2019; Latinovic and Milosevic 2019; Lim 2019).…”

“…This study uses data that cover twelve advanced countries over the period 1948–2015 and reports that the evolution of incomes at the top (top 1 percent) increases mortgage (and business) loans, which is consistent with Rajan’s hypothesis. Another study also introduces mortgage debt but uses it as an explanatory variable and finds that there is a negative and significant relationship between mortgage debt and income inequality (i.e., mortgage debt reduces inequality) (De Vita and Luo 2021).…”

Financial development and income inequality: A meta‐analysis

“…The magnitude of the estimated effect on the relationship between financial development and income inequality varies greatly. A strand of the empirical literature finds robust significant effects of financial development on income inequality (e.g., Beck et al., 2007; de Haan & Sturm, 2017; Zhang & Naceur, 2019), while some studies indicate tenuous or no effects (e.g., Adeleye et al., 2019; De Vita & Luo, 2020; Huang et al., 2009; Park & Shin, 2017). Furthermore, the literature also reports mixed empirical results on the relationship between financial development and inequality depending on various factors and aspects, such as the measurement of financial development and income inequality, differences in estimation methods and the composition of countries (e.g., Altunbaş & Thornton, 2020; Asongu, 2013; Asongu & Tchamyou, 2014; Chakroun, 2020).…”

Income inequality and financialization: a not so straightforward relationship

“…When measured through its impact on income inequality, financialization can also be explained through the marketization lens, as this is reflected by the sustained increase in the social activity that is currently devoted to securities trading in the financial markets. As De Vita and Luo (2020, p. 2) eloquently put it, the channels through which different financialization dimensions can affect income inequality “range from a weakening of certain policies and institutions that help to keep income disparity in check to a shift from the traditional ‘retain and reinvest’ policy of nonfinancial firms to a new profit model that emphasizes prioritizing shareholders' dividends that feed the income of the wealthy.”…”