Financial and Total Wealth Inequality with Declining Interest Rates

Abstract

Financial wealth inequality and long-term real interest rates track each other closely over the post-war period. We investigate how much of the increase in measured inequality can be explained by the decline in rates, and what the implications are for inequality in total wealth (lifetime consumption). We estimate the exposure of financial portfolios to interest rates at the household level to show that there is enough heterogeneity in portfolio revaluations to explain 75% of the rise in financial wealth inequality since the 1980s. A standard incomplete markets model calibrated to these data implies that declining rates are not consumption neutral. Instead, the low-wealth young lose, while the high-wealth old gain.

Keywords: wealth inequality, declining real rates, human wealth, financial wealth

JEL Classification: E01, E24, E25, E44, G12, G51