Relationship between Household Debt and Income Inequality: TVP-VAR Approach

Abstract

This study examines the connection between household debt and income disparity in Thailand, emphasizing the dynamic interaction between these two variables. The study utilizes annual data from 1980 to 2022, a period marked by significant structural changes in the economy. To address these changes, the study implements the Time-Varying Parameter Vector Autoregression (TVP-VAR) estimation method, which is well-suited for capturing dynamic structural shifts. After estimating the model, coefficients were used to generate the impulse response function. The results of the study indicate that a one standard deviation shock in income inequality, as measured by the Gini coefficient, results in a reduction in the household debt-to-GDP ratio across the short, medium, and long term, with the impact being most pronounced in the short term and diminishing over time. Furthermore, the study examines how a shock to income inequality influences consumption patterns. An increase in the Gini coefficient initially leads to a rise in short-term consumption, but this effect reverses in the medium and long term, when consumption declines. The study also explores the impact of household debt shock on consumption. The results indicate that an increase in the debt-to-GDP ratio is associated with a rise in short-term consumption, while in the medium and long term, consumption decreases. These findings highlight the complex and varying impacts of income inequality and household debt on economic indicators over different time horizons, emphasizing the importance of accounting for dynamic structural changes in economic analysis.