Ronald Fischer, Diego Huerta and Patricio Valenzuela
This paper explores the inequality-credit nexus from both a theoretical and an empirical perspective. The paper develops an overlapping generation model in which the effect of income inequality on private credit depends on the countries per capita income and on the quality of laws protecting creditor rights.
The model predicts that greater inequality leads to higher levels of private credit in countries with low per capita incomes and weak legal rights, whereas the reverse is true in countries with high incomes and strong legal rights. Using a panel dataset of 155 countries over the 1982 to 2015 period, the paper shows empirical evidence that is robust and consistent with the model’s pre- dictions. The paper’s major finding suggests a credit channel through which inequality may affect economic outcomes.