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Wealth Inequality in a Low Rate Environment

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  • Matthieu Gomez
  • Émilien Gouin‐Bonenfant

Abstract

We study the effect of interest rates on wealth inequality. While lower rates decrease the growth rate of rentiers, they also increase the growth rate of entrepreneurs by making it cheaper to raise capital. To understand which effect dominates, we derive a sufficient statistic for the effect of interest rates on the Pareto exponent of the wealth distribution: it depends on the lifetime equity and debt issuance rate of individuals in the right tail of the wealth distribution. We estimate this sufficient statistic using new data on the trajectory of top fortunes in the U.S. Overall, we find that the secular decline in interest rates (or more generally of required rates of returns) can account for about 40% of the rise in Pareto inequality; that is, the degree to which the super rich pulled ahead relative to the rich.

Suggested Citation

  • Matthieu Gomez & Émilien Gouin‐Bonenfant, 2024. "Wealth Inequality in a Low Rate Environment," Econometrica, Econometric Society, vol. 92(1), pages 201-246, January.
    • Handle: RePEc:wly:emetrp:v:92:y:2024:i:1:p:201-246
    DOI: 10.3982/ECTA19092
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    1. Jesus Fernandez-Villaverde & Oren Levintal, 2024. "The Distributional Effects of Asset Returns," PIER Working Paper Archive 24-009, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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