Financial and Total Wealth Inequality with Declining Interest Rates

92 Pages Posted: 1 Mar 2021 Last revised: 13 Jul 2021

See all articles by Daniel Greenwald

Daniel Greenwald

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Matteo Leombroni

Stanford University

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER; New York University (NYU)

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Date Written: February 24, 2021

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.

Keywords: wealth inequality, declining real rates, human wealth, financial wealth

JEL Classification: E01, E24, E25, E44, G12, G51

Suggested Citation

Greenwald, Daniel and Leombroni, Matteo and Lustig, Hanno N. and Van Nieuwerburgh, Stijn, Financial and Total Wealth Inequality with Declining Interest Rates (February 24, 2021). Stanford University Graduate School of Business Research Paper , Available at SSRN: https://ssrn.com/abstract=3789220 or http://dx.doi.org/10.2139/ssrn.3789220

Daniel Greenwald

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Matteo Leombroni

Stanford University ( email )

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Hanno N. Lustig

Stanford Graduate School of Business ( email )

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