Declining interest rates fuel financial wealth inequality, impacting household welfare.
Financial wealth inequality increases when real interest rates decline, as households relying more on financial wealth need larger capital gains to maintain their planned consumption levels. However, total wealth inequality, which includes both financial and human wealth, rises less than financial wealth inequality and even decreases at the top of the wealth distribution. This is because high financial-wealth households have a financial portfolio with high duration, leading to the observed increase in financial wealth inequality in response to lower real interest rates.