Working Paper: NBER ID: w28613
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 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 house-hold 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 in-crease 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: financial wealth inequality; total wealth inequality; declining interest rates; household consumption
JEL Codes: E01; E1; E21; E24; E25; E44; G11; G5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lower real interest rates (E43) | Increase in financial wealth inequality (D31) |
| High-wealth households (G51) | Greater capital gains when rates fall (E43) |
| Duration of financial wealth (G51) | Distribution of wealth among households (D31) |
| Low-wealth households (G51) | Widening gap in financial wealth inequality (D31) |
| Total wealth inequality does not increase significantly (D31) | Divergence in behavior of financial versus total wealth inequality (D31) |
| Lifecycle aspect of wealth accumulation (G51) | Understanding dynamics of financial wealth inequality (D31) |