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    Bank of Finland, Rauhankatu 19 B, Helsinki

Mariya Hake (Austrian Central Bank) - Keeping up with the Novaks: determinants of households’ current and planned debt in CESEE

Co-author: Philipp Poyntner (Vienna University of Economics and Business)

Abstract
In this paper, we provide empirical evidence on whether and how income inequality affects household debt in countries in Central, Eastern and Southeastern Europe (CESEE) in the period 2010-2017. Taking advantage of unique data from an OeNB household survey including both EU and non-EU countries, we compute various income inequality measures on regional level, which is a first-time endeavour for most of the countries in our sample. We then relate them to the likelihood of a household to have or/and to plan a loan and to the type of loan. Income and inequality tend to be an important but under researched determinant of household indebtedness (only recently papers started to focus on the topic and mainly for developed economies- e.g. Coibion et al. 2014; Aguiar and Bils 2015). This is especially relevant for some CESEE countries where credit registries and credit history might be still largely absent. On the supply side, the level of (regional) income inequality has a signalling function i.e banks tend to include income inequality, which is an observable information, as an additional factor when assessing the creditworthiness of a client. At the same time, on the demand side, households tend to uphold consumption levels through the welfare-enhancing ("Keeping up with the Novaks")-channel (e.g. Sonik, 2008).
We are also one of the first to apply a multilevel model and take advantage and account for different levels of data (household / region / country) and the heterogeneity along these levels. Our results show that only high-income borrowers in regions with higher income inequality are more likely to have a loan. In addition, only households at the very top income deciles plan a loan and the effect is increasing with higher income disparities. These results have been confirmed by using different measures of income inequality. The policy relevance of our results derives from the fact that household income could be considered a stronger signal of creditworthiness in highly unequal regions due to reduced income mobility. In addition, income inequality might become self-sustained as it produces unequal access to finance reinforcing the initial economic inequality.


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