Understanding U.S. Wealth Inequality: the Role of Heterogeneous Returns | Working Paper (2020)
Do individuals earn different returns on their net worth? How does this shape the distribution of wealth? To answer the first question, this paper uses household-level data from the Survey of Consumer Finances (SCF) to estimate returns to wealth in the United States, from 1989 to 2016. It documents a significant degree of dispersion in average returns, arising both from different asset portfolio allocations and from return differences within narrowly defined asset classes. Wealthier households earn, on average, larger returns: moving from the bottom 50% to the top 1% of the wealth distribution raises the average return by 5.5 percentage points. To understand how these return differences shape the distribution of wealth, I introduce return heterogeneity into a workhorse heterogeneous-agent macroeconomic model calibrated to match the previously estimated return dispersion in US data. This quantitative exercise yields two main results: first, return dispersion is key to understand top wealth shares; and secondly, the degree of return dispersion observed in the data is consistent with persistent return differences (``agent types"), as proposed by Gabaix et al. (2016).
Bubbles and Stagnation | December 2019, Revise and Resubmit, Journal of the European Economic Association
This paper provides a theoretical framework to study the impact of asset bubbles in economies that are vulnerable to a secular stagnation. In an overlapping generations economy, stagnation is the result of a strong shortage of assets that triggers a liquidity trap and forces output to fall because prices are unable to adjust. In this context, bubbles can be useful as they expand the supply of assets and provide liquidity. By absorbing the excess savings in the economy, bubbles increase the natural interest rate and expand aggregate demand, which raises employment and potentially allows the economy to escape the stagnation equilibrium. What is more, the expansionary effects of a bubble may be present even before it actually appears by affecting expected future consumption. But bubbles may also collapse which weakens their expansionary ability. In fact, a bubble that is too risky fails to stimulate consumption and avoid stagnation altogether.