We quantify a model of idiosyncratic labour income and idiosyncratic interest rates to perfectly match the evolution of the wealth distribution of the NLSY 79 cohort from 1986 to 2008. Given a simple and plausible labour income process with a positive growth rate of labour income, the crucial feature is an ex-ante heterogeneity in interest rate distributions and an interest rate that fluctuates between two values. One value lies below and one above the threshold level that implies a stationary long-run wealth distribution. We propose an "investment insurance" which, if implemented in 1986, would have reduced wealth inequality of the NLSY 79 cohort in 2008 by 23%. It would also have increased ex-ante welfare and would even have increased average wealth in 2008 by 38%. The economic rationale behind this surprising finding that everybody becomes richer through an inequality-reducing policy intervention is explained.
Event
Economics Seminar