Financial sector and household balance sheet dynamics: Rethinking the determinants of income and wealth inequality in the USA since the 1980s

The aim of this thesis is to examine the link between financial sector transformation and rising inequality in the USA since the 1980s. The research hypothesis states that differences in household balance sheet structures across the distribution influenced inequality by generating disparities in rates of return and leverage among households. Balance sheet heterogeneity has been shaped by the changing nature of financial sector operations, deregulation, securitisation, and by privatisation and labour market liberalisation. The contribution of this thesis is to develop a theoretical and empirical account of financial sector transformation, wealth distribution, and interactions between income and wealth as the key determinants of inequality in the 21st century. We explicitly explore the intersectional dimension of this relationship with gender, racial, and intergenerational inequality. We develop a three-class stock-flow consistent model of inequality determination calibrated to the US economy to account for the growing wealth heterogeneity among households in the Post-Keynesian macro-models. We observe that differences in wealth composition in the household sector result in higher levels and more adequate patterns of income and wealth inequality than in scenarios without the proposed features. This finding is empirically supported by parametric and non-parametric approaches using data from the U.S. Survey of Consumer Finances between 1989 and 2013. Linear regression analysis finds that dependence on non-financial assets and unsecured debt is associated with lower household income relative to the median, while greater relative holdings of business equity, high-yielding financial assets, and secured debt are related to higher increases in the median income ratio, although these effects are not shared equally across gender, race, and generations. Moreover, inequality decomposition analysis reveals that assets, particularly business equity, high-yielding financial assets, and housing, contribute more to inequality than liabilities. The thesis concludes by analysing policy responses to alleviate inequality in light of the research findings.