Does Income Gap Matter for Household Debt Accumulation?

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Mohd Afzanizam Abdul Rashid
Tamat Sarmidi
Abu Hassan Shaari Md Nor
Nor Ghani Md Noor


The rise in household debt raises the question: what really causes people to take on more debt when they have to serve the cost of borrowings for the rest of their lives? It appears that households are willing to trade their financial freedom for something that is more precious at a time when the gap between the rich and the poor is widening. In this regards, our main objective is to investigate the relationship between household debt and income gap. The understanding of this issue may give good insights as to how household would make decisions to leverage their balance sheet. This is particularly true in the context of “keeping up with the Jones’s” which provides the theoretical framework of such phenomenon while greater access to credit would facilitate the process. In this research, the Generalized Methods of Moments (GMM) technique is employed for 55 countries and covers the period from 2000 to 2012. The results showed that there is a significant positive relationship between income gap and household debt. In addition, the level of indebtedness is deemed to be persistent throughout our sample countries, suggesting that households will remain in debt-trap.


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