The Rise in Inequality, the Decline in the Natural Interest Rate, and the Increase in Household Debt

Ansgar Rannenberg

International Journal of Central Banking, 2023, vol. 19, issue 2, 1-93

Abstract: I investigate the effect of rising income inequality on the natural rate of interest in an economy with “rich” households who have “capitalist spirit” type preferences over their wealth, “non-rich” households, and housing and credit markets. Simulating the increase in U.S. income inequality over the 1981–2016 period generates a downward trend in the natural rate in line with recent empirical estimates. The model also broadly captures the upward trend in the debt-to-income ratio and loan-to-value ratio of the bottom 90 percent of households, as well as the upward trend in the value of the housing stock during this period.

JEL-codes: D14 E25 E43 E52 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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