The Linkage between Household Debt with Consumption and Income Inequality

Damian, Nicole Anne (2023) The Linkage between Household Debt with Consumption and Income Inequality. Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

One of the primary topics in Malaysia has been the growing concern over the expansion of household debts. This paper attempts to investigate the determinants of household debt in Malaysia. The objective of this study is to examine the long run and short run relationship between consumption, income inequality and economic growth with household debt by employing annual data over the period of 1996 to 2020. The proxy variables used to measure consumption and income inequality are household consumption and Gini Index, respectively. This study has employed the Autoregressive Distributed Lag (ARDL) approach and Error Correction Model based on ARDL to examine the cointegration between the variables. The results show that in the long run, consumption and economic growth has a significant impact on household debt. Furthermore, we have found that consumption is negatively correlated with household debt while economic growth is positively correlated with household debt in the long run. However, in the short run, only economic growth has a positive and significant impact on household debt. The results reveal that income inequality is insignificant in both long and short run which indicates that there are other variables that should be examined for future research. Based on the findings, the Malaysian government should implement policies that equally benefit the lower income group, encourage smart investment decisions especially among the younger generation and destigmatise the usage of financial counselling to reduce the overall household debt level in Malaysia