Rising income inequality goes a long way toward explaining why interest rates have been and may remain very low into the future, according to new research
presented at a conference held by the Federal Reserve Bank of Kansas City Friday.
The paper’s authors said that their finding pushes back at the widely held idea that interest rates, as measured by, have been held down by demographic shifts, most notably the retirement of baby boomers. R-star describes the level of interest rates that are neutral in terms of its influence on the overall momentum of the economy.
“There has been a large rise in income shares for high income households since the 1980s,” the paper said. “The result has been a large rise in saving by high income earners since the 1980s, which is the exact same time period during which r-star has fallen,” it said. Persistently low interest rates have been a thorn in the side of the world’s top central banks for a number of years. Given that the rate of interest that has a neutral impact on economic momentum is much lower than it once was, central banks have had to keep rates lower than historical levels and have had less room to lower them to deal with economic stress.
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