Increasing inequality and \u85nancial instability

Rising inequality a¤ects the composition of asset demands as well as aggregate demand. The poor have few \u85nancial assets and their portfolio is skewed towards \u85xed-income assets. The rich, by contrast, hold a large proportion of their wealth in stocks. Thus, an increase in inequality tends to raise the demand for stocks. This generates capital gains, and these gains can fuel a bubble, as desired portfolios shift further towards stocks