Do low interest rates increase inequality?
In this paper, Gomez and Gouin-Bonenfant develop a model where there are two types of agents: entrepreneurs and rentiers. Entrepreneurs are endowed with heterogeneous firms and rely on capital investments from rentiers. Eventually entrepreneurs sell their firms and become rentiers who live forever and hold a diversified portfolio.
They find that lower interest rates can actually increase top wealth inequality. Even though lower rates decrease the average growth rate of the rentiers’ fortunes, they increase the growth rate of new fortunes by making it cheaper for successful entrepreneurs to raise capital. In particular, the direct effect of lower rates on top wealth inequality is large: the 4% decline in discount rates from 1985 to 2015 accounts for roughly two-thirds of the rise in top wealth inequality. This finding is guided by the observation that, in the U.S., entrepreneurs reaching the top of the wealth distribution rely heavily on external financing.
A Q-Theory of Inequality
Authors: Matthieu Gomez, Emilien Gouin-Bonenfant
From: Columbia University
Housing wealth and inequality
In this paper, Clara Martinez-Toledano studies the implications of housing booms and busts for wealth inequality, examining two episodes over the last four decades in Spain. She combines fiscal data with household surveys and national accounts to reconstruct the entire wealth distribution and develop a new asset-specific decomposition of wealth accumulation to disentangle the main forces behind wealth inequality dynamics.
[She] finds that the top 10% wealth share drops during housing booms, but the decreasing pattern reverts during busts. Differences in capital gains across wealth groups appear to be the main drivers of the decline in wealth concentration during booms. In contrast, persistent differences in saving rates across wealth groups and portfolio reshuffling towards financial assets among top wealth holders are the main explanatory forces behind the reverting evolution during housing busts.
House Price Cycles, Wealth Inequality and Portfolio Reshuffling
Authors: Clara Martínez-Toledano
From: Columbia University
