Must-Read: Dietrich Domanski et al.: Wealth Inequality and Monetary Policy

Must Read: Note the difference between wealth inequality and income inequality. Lowering interest rates raises wealth inequality (by boosting the value of old capital) and lowers income inequality (by reducing the rate of return earned on new capital). Cf: John Maynard Keynes, “euthanasia of the rentier*…

Dietrich Domanski et al.: Wealth Inequality and Monetary Policy:

Explor[ing] the recent evolution of household wealth inequality in advanced economies by looking at valuation effects on household assets and liabilities….

Using household survey data, we analyse the possible drivers of wealth inequality and the potential effect of monetary policy through its impact on interest rates and asset prices. Our simulation suggests that wealth inequality has risen since the Great Financial Crisis. While low interest rates and rising bond prices have had a negligible impact on wealth inequality, rising equity prices have been a key driver of inequality. A recovery in house prices has only partly offset this effect. Abstracting from general equilibrium effects on savings, borrowing and human wealth, this suggests that monetary policy may have added to inequality to the extent that it has boosted equity prices.