How do stock market experiences shape wealth inequality?
This paper develops a continuous-time overlapping generations model with rare disasters and learning-from-experience agents. Disasters such as the Great Depression permanently scar investors’ trust in the market. As a consequence, generations that have experienced disasters save in the form of safer portfolios, even if similar disasters are not likely to happen again in their lifetimes. “Fearing to attempt” therefore inhibits wealth accumulation by these “depression babies” relative to other generations. This effect is amplified in general equilibrium, because the equity premium is relatively high following a disaster. When calibrated to US data, the model can explain 18.7% of the recent increase in intergenerational wealth inequality.
Date:
23 October 2020, 13:00
Venue:
Held on Zoom
Speaker:
Xiaowen Lei (University of Oxford)
Organising department:
Department of Economics
Part of:
Macroeconomics Working Group
Booking required?:
Not required
Audience:
Members of the University only
Editor:
Melis Clark
