Diverging Income, Emerging Debt: A State-Level Analysis of Inequality Induced Credit Creation

Abstract

Increases in the income share of individuals at the top of the income distribution should trigger a credit creation process that enables other members of the income distribution to access the credit market and absorb the excess savings deposited by top earners. I perform an empirical state-level analysis of the United States from 1997 to 2015 to test the presence and effectiveness of this process in practice. I find limited evidence that income inequality creates credit among low-income households, which suggests that this theoretical process may be overstated or disrupted by credit constraints.