The Rise in Inequality, the Decline in the Natural Interest Rate, and the Increase in Household Debt

I investigate the effect of rising income inequality on the natural rate of interest in an economy with "rich" households who have "capitalist spirit" type preferences over their wealth, "non-rich" households, and housing and credit markets. Sim-ulating the increase in U.S. income inequality over the 1981- 2016 period generates a downward trend in the natural rate in line with recent empirical estimates. The model also broadly captures the upward trend in the debt-to-income ratio and loan-to-value ratio of the bottom 90 percent of households, as well as the upward trend in the value of the housing stock during this period.