Income inequality and household debt as a factor of financial fragility in the spanish economy

Abstract

After the last major financial crisis, there was much discussion about the idea that the increase in income inequality during the expansionary phase could have forced middle- and low-income groups to increasingly resort to indebtedness to finance their consumption. This debt-led consumption would have stimulated economic growth, but would also explain why it was not sustainable since families would have become more financially fragile. This approach, which we refer to as the ‘income inequality and debt-financed consumption as a cause of financial fragility hypothesis’, is based on empirical studies that mostly consider the US economy. In this article, we examine whether, as some of the literature suggests, this assumption is sufficient to explain the expansion and subsequent recession in the Spanish economy.