Does inequality lead to credit growth? Testing the Rajan hypothesis using state-level data

- We use state-level data to test the Rajan Hypothesis that an increase in inequality can lead to a credit boom.
- We use dynamic heterogeneous panel estimation methods (i.e. MG, PMG, DFE).
- We find a positive (and significant) long-run relationship between inequality and real estate lending.

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 find a significant positive long-run relationship between inequality and real estate lending across U.S. states.