Financial and Total Wealth Inequality with Declining Interest Rates

84 Pages Posted: 29 Mar 2021 Last revised: 1 Aug 2021

See all articles by Daniel Greenwald

Daniel Greenwald

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

Matteo Leombroni

Stanford University

hlustig@stanford.edu Lustig

Stanford University

Stijn Van Nieuwerburgh

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

Multiple version iconThere are 3 versions of this paper

Date Written: March 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 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.

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Suggested Citation

Greenwald, Daniel and Leombroni, Matteo and Lustig, hlustig@stanford.edu and Van Nieuwerburgh, Stijn, Financial and Total Wealth Inequality with Declining Interest Rates (March 2021). NBER Working Paper No. w28613, Available at SSRN: https://ssrn.com/abstract=3814601

Daniel Greenwald (Contact Author)

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

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Matteo Leombroni

Stanford University ( email )

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Hlustig@stanford.edu Lustig

Stanford University

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business ( email )

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