Working Paper: CEPR ID: DP16081
Authors: Daniel L. Greenwald; Matteo Leombroni; Hanno Lustig; Stijn Van Nieuwerburgh
Abstract: Financial wealth inequality and long-term real interest rates track each other closely over the post-war 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 plannedbefore 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 ofthe 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.
Keywords: wealth inequality; interest rates; secular stagnation; human wealth; duration
JEL Codes: E21; E25; E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in long-term real interest rates (E43) | Increase in financial wealth inequality (D31) |
| Decline in long-term real interest rates (E43) | Larger capital gains for high-wealth households (D14) |
| Larger capital gains for high-wealth households (D14) | Greater disparity in financial wealth (D31) |
| Increase in financial wealth inequality (D31) | Financial wealth distribution becomes more concentrated (D31) |
| Total wealth inequality (D31) | Does not rise as significantly or may decline (E32) |