Abstract
We investigate the effect of income inequality on household borrowing using administrative data and a new instrumental variable approach. We find a clear and robust effect of inequality on household debt. Exploring the dynamics of how income inequality increases household leverage, we uncover evidence supporting a new housing channel. First, income inequality contributes to higher housing prices; second, higher house values provide additional wealth and collateral against which households can borrow. Furthermore, we show that home equity withdrawals are used to finance consumption and increase the risk of financial fragility.