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

Author

Listed:
  • Moritz Drechsel-Grau
  • Fabian Greimel

Abstract

This paper studies whether the interplay of social comparisons in housing and rising income inequality contributed to the household debt boom in the US 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 a substantial share of the observed housing and debt boom.

Suggested Citation

  • Moritz Drechsel-Grau & Fabian Greimel, 2024. "Falling Behind: Has Rising Inequality Fueled the American Debt Boom?," CESifo Working Paper Series 11565, CESifo.
    • Handle: RePEc:ces:ceswps:_11565
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp11565.pdf
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    More about this item

    Keywords

    mortgages; housing boom; social comparisons; consumption networks; external habits; keeping up with the Joneses;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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