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Financial and Total Wealth Inequality with Declining Interest Rates

Author

Listed:
  • 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.

Suggested Citation

  • Daniel L. Greenwald & Matteo Leombroni & Hanno Lustig & Stijn Van Nieuwerburgh, 2021. "Financial and Total Wealth Inequality with Declining Interest Rates," NBER Working Papers 28613, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:28613
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    Cited by:

    1. 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).
    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. 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.
    4. 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..
    5. Paul Beaudry & Césaire Meh, 2021. "Monetary Policy, Trends in Real Interest Rates and Depressed Demand," Staff Working Papers 21-27, Bank of Canada.
    6. Jesús Fernández-Villaverde & Oren Levintal, 2024. "The Distributional Effects of Asset Returns," NBER Working Papers 32182, National Bureau of Economic Research, Inc.
    7. Fisher, Jack & Gavazza, Alessandro & Liu, Lu & Ramadorai, Tarun & Tripathy, Jagdish, 2024. "Refinancing cross-subsidies in the mortgage market," Journal of Financial Economics, Elsevier, vol. 158(C).
    8. Fisher, Jack & Gavazza, Alessandro & Liu, Lu & Ramadorai, Tarun & Tripathy, Jagdish, 2024. "Refinancing cross-subsidies in the mortgage market," Journal of Financial Economics, Elsevier, vol. 158(C).
    9. Paz-Pardo, Gonzalo, 2022. "Younger generations and the lost dream of home ownership," Research Bulletin, European Central Bank, vol. 91.

    More about this item

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • 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
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G5 - Financial Economics - - Household Finance

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