Inequality, the risk of secular stagnation and the increase in household debt

Working Paper N° 375

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I investigate the effect of rising income inequality on the natural rate of interest in an economy with “rich” households with preferences over wealth and “non-rich” households, a housing market and credit market frictions. Simulating the increase in interpersonal and functional income inequality over the 1981-2016 period replicates the downward trend in the natural rate of interest estimated by Laubach and Williams (2016), most of the increase in the debt-to-income ratio of the bottom 90 % of households and the upward trend in house prices observed during this period.