The Macroeconomics of Wealth Inequality

Wealth inequality is currently high on both political and scientific agendas. A substantive body of research (for instance Piketty, 2014) documents that over the past decades, wealth inequality, in particular the concentration of wealth among the very richest, has grown sharply in developed economies. In the field of macroeconomics, progress has been made to understand the level and growth of wealth inequality, but large pieces of the picture are still missing. In particular, little is known about the drivers behind inequality, and the macroeconomic consequences of inequality itself. Moreover, the dominant models used to analyse monetary and fiscal policy still largely ignore the fact that households are heterogeneous. This project aims to unveil underlying factors behind the dynamics of inequality, and to assess the macroeconomic consequences of these forces and wealth inequality itself. The approach will be to utilize high-quality Norwegian data in combination with precise theory on how heterogeneity affects economic aggregates. Recent methodological advances on how to incorporate heterogeneity in macroeconomic models, will play a key role. When called for, new models will be developed to achieve consistency with micro-level facts. Some of the specific questions that the project will attempt to answer include: How does saving behaviour vary with wealth across households? How does demographical change affect the macroeconomic influence of policy tools? How does assortative mating interact with inequality in wealth? More generally, the project aims to provide facts that are key to understand wealth inequality and its macroeconomic consequences, and thereby enlighten the ongoing debates on this phenomenon. Peer review publications: In the article "Earnings Dynamics and Its Intergenerational Transmission: Evidence from Norway" we take a closer look at the development of income inequality and the income distribution more generally. We find, among other things, that Norway has not been immune to the increase in top income inequality that has also been seen recently in other countries. Income distribution widens in the upper decile of income distribution. By linking individuals in the same family together, we also examine the degree of transfer of income dynamics between generations. Children of high-income, high-wealth fathers enjoy steeper income growth over the life cycle and face more volatile (but more positively skewed) changes in income, suggesting that they are more likely to pursue high-return, high-risk careers. The income growth of children in families with lower income is more gradual and more skewed, and shows a higher risk of major negative shocks in development. In the article «Monetary Policy and Household Debt» we study a specific channel of the monetary policy on the distribution of household debt over time: increased interest rates set by Norges Bank contributes to lower inflation. However, lower inflation over time leads to a higher growth in the levels of household real debt. The article quantifies this channel in a descriptive way. Thus, lower inflation may by itself contribute to an increased debt burden at the level of the household through this channel. In the article "MPC Heterogeneity and Household Balance Sheets", we look at how heterogeneity (inequality) in economic variables among the population affects the macroeconomy, through the fact that, for example, individuals with low liquid wealth respond more strongly to economic shocks than others. We do this by studying households that win a larger lottery win during the sample period. The findings are largely in line with standard economic models, which we also discuss in more detail in the article, but the general response among the households to an income shock is somewhat greater than what economic theory predicts. How family background affects outcomes as adults is a research question with longstanding interest. In the article "Why Do Wealthy Parents Have Wealthy Children?" we take a closer look at how wealth inequality can be maintained between generations thanks to intergenerational transmission mechanisms. The findings in the article show that the relationship between generations is not only strong in families with a genetic relationship between children and parents, also between children and parents in families where there is no genetic link (adoptive children and parents) we find a strong connection in outcomes related to wealth and financial risk-taking. This suggests that family background, in addition to genes, is also important for children's financial outcome later in life. Furthermore, the project has ongoing articles that are at different stages of the peer review process. This includes a project studying the household saving behavior across the wealth distribution, and projects related to how assortative mating and marital dissolution (divorce) may contribute to the development of wealth inequality.

Prosjektet har hatt virkninger og effekter både når det kommer til resultatene i prosjektet, men også for prosjektets deltakere. Utviklingen i og effektene av økonomisk ulikhet er et tema som stadig går igjen såvel i akademiske kretser, men også for blant forvaltning og politikk-utøvere. Flere av våre funn har vært presentert i politikk-institusjoner som sentralbanker, og vi oppfatter at disse er interessert i å lære mer om betydningen av heterogenitet i responsen til feks politikk-sjokk og hva dette betyr for utviklingen av økonomiske modeller. Selv om det er vanskelig å kvantifisere opplever vi at fokus i økonomi-miljøene dreies i retning av de sentrale temaene i prosjektet som knytter seg til husholdningenes heterogenitet og ulikhet, og årsaker til og virkninger av dette. Prosjektet har også hatt direkte effekt på deltakerne i prosjektet, og kompetansen på husholdningsdata og forskningstema har bidratt til jobb-muligheter hos relevante arbeidsgivere. Prosjektet har også bidratt til internasjonalt samarbeid og vært med på å åpne dørene for EU prosjekter (ERC Grants).

Across countries, a small fraction of the population controls a large and growing share of the economy's wealth. Thus, inequality has risen to the forefront of current academic, popular, and policy debates. The field of macroeconomics has made progress to understand the level and growth of wealth inequality, but large pieces of the picture are still missing. In particular, little is known about the macroeconomic consequences of inequality itself and the drivers behind it. For instance, the dominant models used to analyze monetary and fiscal policy still largely ignore household heterogeneity. This project aims to unveil the underlying factors behind the dynamics of inequality, and to assess the macroeconomic consequences of these forces and wealth inequality itself. The main challenge to scientific progress in this field is to utilize high-quality data in combination with precise theory on how heterogeneity affects economic aggregates. When called for, new models must be developed consistently with micro-level facts. We will combine high-quality Norwegian administrative data with recent methodological advances on how to incorporate heterogeneity in macroeconomic models. A main output from the project will be to establish how much different dimensions of household level heterogeneity contribute to wealth inequality and macroeconomic dynamics. Such facts are essential for improving frameworks to address macroeconomic policy, as no model can incorporate all dimensions of heterogeneity at once. Moreover, these facts will improve our understanding of growing wealth inequality in itself, and hence enlighten the ongoing debates on this phenomenon.