Financial and Total Wealth Inequality with Declining Interest Rates
Financial wealth inequality and long-term real interest rates track each other closely over the post-war period. Faced with lower returns on financial wealth, households with high levels of financial wealth must increase savings 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.
The authors thank Sebastian Hanson and Yuan Tian for excellent research assistance. We thank Adrien Auclert, Ben Moll, Sylvain Catherine, Peter DeMarzo, and seminar participants at Stanford GSB and Columbia GSB. The authors have no financial disclosures to make. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.