Income Inequality, Household Debt, and Consumption Growth in the United States

Abstract

In this paper, the SV-TVP-VAR model is used to study the relationships between income inequality, household debt, and consumption growth in the US. This is of great significance for studying whether household debt can become a “substitute” for income and whether it is possible to achieve sustainable growth in consumption under the background of worsening income inequality. According to the research results, the main conclusions are as follows: Firstly, the widening of income inequality would increase consumption in the short term but restrain consumption in the medium and long term, as the relationship between them would turn from positive to negative. Secondly, household debt could improve consumption in the short term but reduce consumption in the medium and long term, with long-term effects being greater than medium-term effects, which means that the long-term negative impact of US household debt on household consumption would be persistent. Lastly, widening income inequality has led to rising household debt over different maturities.

Measuring the Effect of Income Inequality, Financial Inclusion, Investment, and Unemployment, on Economic Growth in Africa: A Moderating Role of Digital Financial Technology

“…Contrary to the conclusions of Bai et al (2023) found that income disparity is positively and in most cases strongly connected with economic growth. Using a more comprehensive data set on income inequality, Ali (2023) and Piao et al (2023) revaluated the association between income disparity and economic growth and found a robust positive correlation between an increase in income inequality and subsequent economic growth in the short and medium term. Peña Proaño, and Schnellbacher ( 2023) used a cross-country analysis of the impact of income inequality on economic growth in India and found that inequality actually had a large, positive impact on state economies.…”

The Long-Term Impact of Household Debts on Household Consumption in the Context of High Housing Prices in China

“…The rapid rise of household debt significantly impacts consumption (Piao et al, 2023;Yan & Zhu, 2013). In the short term, financial institutions provide loans in a timely and effective manner with lower costs and relaxed conditions that promote current consumption (Xiong, 2014).…”

“…China has a dual social structure comprised of urban and rural areas. There are significant differences between urban and rural families regarding income level, assets, and culture (Piao et al, 2023). Urban families have a higher income level, and their social security level is more stable than rural families.…”

“…China's economy has experienced impressive growth throughout the past 40 years of economic reform and development. However, excessive reliance on investment and foreign trade has resulted in deficient consumption among citizens, becoming one of the main problems hindering sustained economic growth (Piao et al, 2023;Qalati et al, 2023). More specifically, since the European debt crisis and the U.S. subprime mortgage crisis in 2008, China's foreign trade exports have significantly been negatively impacted (He & Shi, 2014), and business enterprises have switched from focusing on export to domestic demand, which further aggravates the contradiction between supply and demand.…”

“…However, promoting real estate development by increasing household housing debt stimulates the economy in the short term because of no effect on resident consumption expenditure. In the long run, household housing debt will crowd out household consumption, and scholars have agreed that the increase in housing loans may reduce the long-term consumption expenditure of residents(Bunn et al, 2016; Chen et al, 2019;Fan & Yavas, 2020;Piao 2023).…”