Empirical Study on the Relationship Between Private Credit and Income Distribution: Focusing on Household Debt and Income Inequality

In many advanced economies, the increase in private credit and household debt has been paralleled by a deepening of income inequality, spurring interest in the relationship between these factors. In Korea, household debt levels relative to the economy are among the highest globally, necessitating a systematic analysis of the links between private credit, household debt, and income inequality. While prior research often suggests that rapid credit growth heightens the risk of financial crises, empirical evidence on the direct relationship between private credit expansion and income inequality remains inconsistent. Since Rajan (2010), much of the literature has focused on how income inequality can drive credit expansion, potentially leading to financial instability; however, some studies suggest that credit growth itself may exacerbate inequality. Despite these insights, a comprehensive examination of these dual pathways has been lacking. This study addresses this gap by conducting an empirical analysis of the interrelationships between income inequality, household debt, and financial crises, using OECD panel data and quarterly time-series data from Korea. Notably, we focus on the direct relationship between household debt and income inequality. Going beyond previous studies on cross-country panels, we analyze Korea’s unique economic environment, offering relevant findings and insights that align with Korea’s specific economic context.