Financial and Total Wealth Inequality with Declining Interest Rates
90 Pages Posted: 14 May 2021
Date Written: April 1, 2021
Financial wealth inequality and long-term real interest rates track each other closely over the postwar period. Faced with unanticipated lower real rates, households which rely more on financial wealth must see large capital gains to afford the consumption that they planned before the decline in rates. Lower rates beget higher financial wealth inequality. Inequality in total wealth, the sum of financial and human wealth and the relevant concept for household welfare, rises much less than financial wealth inequality and even declines at the top of the wealth distribution. A standard incomplete markets model reproduces the observed increase in financial wealth inequality in response to a decline in real interest rates because high financial-wealth households have a financial portfolio with high duration.
JEL Classification: E21, E25, E44, G12
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