DP16081 Financial and Total Wealth Inequality with Declining Interest Rates

Author(s): Daniel L. Greenwald, Matteo Leombroni, Hanno Lustig, Stijn van Nieuwerburgh
Publication Date: April 2021
Keyword(s): Duration, human wealth, interest rates, secular stagnation, Wealth Inequality
JEL(s): E21, E25, E44, G12
Programme Areas: Financial Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16081

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 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.