Their evidence is about low interest rates increasing wealth inequality through increased asset prices. But, that’s incredibly hard to measure and empirics show they’re wrong. Instead, prefer a focus on income inequality, of which consensus flows neg

“2021 Annual Economic Report,” Bank for International Settlements, June 2021, https://www.bis.org/publ/arpdf/ar2021e.pdf

[[Begin Box II.C]]

The impact of interest rates on wealth inequality

With interest rates remaining very low for long periods post-GFC, their impact on inequality has come into focus. Interest rates influence wealth inequality primarily through their effect on asset prices – a key channel in the monetary transmission mechanism. For instance, low interest rates and quantitative easing boost asset prices. Low rates in general increase them by raising the present value of future income streams from those assets and by encouraging borrowing for their acquisition. Central bank asset purchases, in addition, directly boost the corresponding assets’ prices, notably at the long end of the maturity spectrum. Accordingly, stock market indices and house prices have soared since the GFC in major AEs and reached new highs as interest rates have been exceptionally low and central banks have resorted to large-scale asset purchases (Graph II.C, left-hand panel). There is a broad consensus that such policies reduce income inequality to the extent that they raise employment, but what is their overall impact on wealth inequality?

[[Figure Omitted]]

The effect of central banks’ asset purchases and low-for-long interest rates on wealth inequality depends critically on who owns houses, bonds and equities. This varies a great deal across countries (Graph II.C, centre panel). In general, home ownership tends to be far more dispersed in the population than equity ownership, which tends to be concentrated at the top of the income distribution. More people therefore experience wealth gains due to rising house prices. Depending on how much house prices rise relative to equity and the weights of these assets in households’ portfolios, the net effect of lower interest rates can actually lead to a decrease in some wealth inequality measures, such as the Gini index. If, however, only the wealthiest segment of the population owns houses and equity, wealth inequality will tend to rise as a result of lower interest rates. In fact, in the United States, France and Germany, post-GFC large-scale asset purchases have not coincided with a noticeable rise in wealth inequality among the top 10%, or even among the top 1% (righthand panel). Of course, surging house prices would still have distributional implications between owners and tenants, typically favouring the old at the expense of the young and possibly raising concerns about home affordability.

In interpreting these results, it is worth bearing in mind that wealth inequality is harder to measure than income inequality (see Box II.A), and data are inevitably patchier. Firm conclusions on the evolution of wealth inequality over short horizons are therefore much harder to draw.

[[End Box II.C]]