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Inequality and Real Interest Rates

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  • Lancastre, Manuel

Abstract

We use an overlapping generations New Keynesian model with borrowing constraints and a bequest motive, to show how an increase of income inequality may trigger a permanent reduction of the real interest rate, %, based on the heterogeneity of marginal borrowing and saving rates among household income types. (i) via a contraction of aggregate borrowing, when the marginal borrowing rate of the wealthier is lower than the one of the poorer with respect to income. (ii) We then show how an increase of inequality may trigger an expansion of savings through the channel of a bequest motive where generosity towards the next generation increases endogenously with lifetime income, so that the marginal savings rate of the wealthier is higher than the poorer.

Suggested Citation

  • Lancastre, Manuel, 2016. "Inequality and Real Interest Rates," MPRA Paper 85047, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:85047
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    References listed on IDEAS

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    Cited by:

    1. Ansgar Rannenberg, 2019. "Inequality, the risk of secular stagnation and the increase in household deb," Working Paper Research 375, National Bank of Belgium.
    2. Apergis, Nicholas, 2024. "The role of loan loss provisions in income inequality: Evidence from a sample of banking institutions," Journal of Financial Stability, Elsevier, vol. 73(C).
    3. Michael Buchner, 2020. "Fiscal Policy in an Age of Secular Stagnation," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(3), pages 398-429, September.
    4. Christopher D. Cotton, 2020. "The Inflation Target and the Equilibrium Real Rate," Working Papers 20-2, Federal Reserve Bank of Boston.

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    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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