Title: Household debt, inequality, and financial stability nexus

Authors: Margaret Rutendo Magwedere; Godfrey Marozva

Addresses: Department of Finance, Risk Management and Banking, School of Economics and Financial sciences, College of Economics and Management Sciences, University of South Africa, 1 Preller St., Muckleneuk 0002, Pretoria, South Africa ' Department of Finance, Risk Management and Banking, School of Economics and Financial sciences, College of Economics and Management Sciences, University of South Africa, 1 Preller St., Muckleneuk 0002, Pretoria, South Africa

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.

Keywords: household debt; inequality; financial stability; indebtedness; ARDL; autoregressive distributed lags.

DOI: 10.1504/IJMEF.2023.130889

International Journal of Monetary Economics and Finance, 2023 Vol.16 No.2, pp.139 - 156

Received: 06 Jan 2022
Accepted: 06 Feb 2023
Published online: 13 May 2023 *

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