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The Rise in Inequality, the Decline in the Natural Interest Rate, and the Increase in Household Debt

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  • Ansgar Rannenberg

    (National Bank of Belgium)

Abstract

I investigate the effect of rising income inequality on the natural rate of interest in an economy with “rich” households who have “capitalist spirit” type preferences over their wealth, “non-rich” households, and housing and credit markets. Simulating the increase in U.S. income inequality over the 1981–2016 period generates a downward trend in the natural rate in line with recent empirical estimates. The model also broadly captures the upward trend in the debt-to-income ratio and loan-to-value ratio of the bottom 90 percent of households, as well as the upward trend in the value of the housing stock during this period.

Suggested Citation

  • Ansgar Rannenberg, 2023. "The Rise in Inequality, the Decline in the Natural Interest Rate, and the Increase in Household Debt," International Journal of Central Banking, International Journal of Central Banking, vol. 19(2), pages 1-93, June.
    • Handle: RePEc:ijc:ijcjou:y:2023:q:2:a:1
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    References listed on IDEAS

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    Cited by:

    1. Mark Robinson & Pedro Silos & Diego Vilán, 2025. "Household Debt, the Labor Share, and Earnings Inequality," Finance and Economics Discussion Series 2025-028, Board of Governors of the Federal Reserve System (U.S.).
    2. Ansgar Rannenberg & Thomas Theobald, 2022. "Income inequality and the German export surplus," Working Paper Research 424, National Bank of Belgium.

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    More about this item

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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