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Asset prices, wealth inequality, and welfare: safe assets as a solution

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  • Hui, Xitong

Abstract

Can rising asset prices reduce wealth inequality? This paper builds a continuous-time heterogeneous-agent general equilibrium in which entrepreneurs hold risky private capital and traditional savers hold safe assets. Safe-asset expansions—via financial innovation, public debt, or a stable equity bubble—operate through a single pass-through: they lower entrepreneurs’ undiversified risk exposure, compress risk premia, and raise the interest rate. This slows entrepreneurial wealth accumulation and redistributes wealth toward traditional savers, so inequality falls even as risky asset valuations rise. Savers gain unambiguously. Entrepreneurs’ welfare is state-dependent: when their wealth share is low, they prefer a higher risk premium and lose from safe-asset expansions; once sufficiently wealthy, they prefer a higher interest rate that protects a larger wealth base and gain. JEL Classification: D31, G12, E21, E44

Suggested Citation

  • Hui, Xitong, 2025. "Asset prices, wealth inequality, and welfare: safe assets as a solution," Working Paper Series 3162, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253162
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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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