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Financial and Total Wealth Inequality with Declining Interest Rates

Author

Listed:
  • Van Nieuwerburgh, Stijn
  • Greenwald, Dan
  • Leombroni, Matteo
  • Lustig, Hanno

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 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.

Suggested Citation

  • Van Nieuwerburgh, Stijn & Greenwald, Dan & Leombroni, Matteo & Lustig, Hanno, 2021. "Financial and Total Wealth Inequality with Declining Interest Rates," CEPR Discussion Papers 16081, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16081
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    Cited by:

    1. Paul Beaudry & Césaire Meh, 2021. "Monetary Policy, Trends in Real Interest Rates and Depressed Demand," Staff Working Papers 21-27, Bank of Canada.
    2. Felici, Marco & Kenny, Geoff & Friz, Roberta, 2023. "Consumer savings behaviour at low and negative interest rates," European Economic Review, Elsevier, vol. 157(C).
    3. Andersen, Torben M. & Bhattacharya, Joydeep & Grodecka-Messi, Anna & Mann, Katja, 2022. "Pension reform and wealth inequality: evidence from Denmark," Working Paper Series 411, Sveriges Riksbank (Central Bank of Sweden).
    4. Fisher, Jack & Gavazza, Alessandro & Liu, Lu & Ramadorai, Tarun & Tripathy, Jagdish, 2021. "Refinancing cross-subsidies in the mortgage market," Bank of England working papers 948, Bank of England.
    5. Paz-Pardo, Gonzalo, 2022. "Younger generations and the lost dream of home ownership," Research Bulletin, European Central Bank, vol. 91.
    6. Atif Mian & Ludwig Straub & Amir Sufi, 2021. "What explains the decline in r ∗ ? Rising income inequality versus demographic shifts," Working Papers 2021-12, Princeton University. Economics Department..

    More about this item

    Keywords

    Wealth inequality; Interest rates; Secular stagnation; Human wealth; Duration;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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