Asset bubbles and wealth inequality

Abstract

AbstractWe examine the causal link between asset bubbles and wealth inequality in a two‐agent macroeconomic model. Bubbles influence wealth inequality through two channels: altering the debt–asset ratio and fuelling speculation. When bubbles grow, they can temporarily decrease wealth inequality if asset prices rise faster than debt. However, when they burst, wealth inequality increases as the debt–asset ratio rises. Steady‐state wealth inequality is unaffected by bubbles if household types share symmetric speculative timing. Although macroprudential policy, communication, and leaning against the wind can reduce negative bubble effects on aggregate utility, they have a limited effect on wealth inequality.