Household debt, inequality, and financial stability nexus

Abstract

South Africa is ranked among the most unequal societies globally in terms of income disparities. The South African Reserve Bank reckoned that 75% of households' income goes to debt repayment. The link between household debt, income inequality and financial stability is examined at national level using annual time series data from 1990 to 2020. Using the autoregressive distributed lags (ARDL) and the Error Correction Model to isolate the long- run and short-run links, the results show that there is long-run relationship between household debt, income inequality and financial stability. Furthermore the results suggest a strong causality as shown by a negative and significant error correction term. In economies where households' income fall below their reference group, in keeping up with the Joneses they tend to borrow increasing the level of indebtedness. The study found evidence that inequality increases indebtedness in the long-run. The findings of the study are essential on the relevance of the interactions between private debt and inequality to macroeconomic stability.