Does Inequality Lead to Credit Growth? Testing the Rajan Hypothesis Using State-Level Data

This paper uses state-level data to test the Rajan hypothesis, from his book Fault Lines, that an increase in inequality can lead to a credit boom. Using dynamic heterogeneous panel estimation methods (i.e. MG, PMG, DFE), we nd a signi cant negative long-run relationship between inequality and real estate lending across U.S. states. In addition, we nd evidence indicating that the path of causality runs from inequality to credit.

Author: Steven Yamarik, Makram El Shagiy and Guy Yamashiro
Volume: 2016.01
Publisher: INFER
Year: 2016
No. of pages: 15
Category: INFER working papers



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