Inequality and Real Interest Rates

We use an overlapping generations New Keynesian model with borrowing constraints and a bequest motive, to show how an increase of income inequality may trigger a permanent reduction of the real interest rate, %, based on the heterogeneity of marginal borrowing and saving rates among household income types. (i) via a contraction of aggregate borrowing, when the marginal borrowing rate of the wealthier is lower than the one of the poorer with respect to income. (ii) We then show how an increase of inequality may trigger an expansion of savings through the channel of a bequest motive where generosity towards the next generation increases endogenously with lifetime income, so that the marginal savings rate of the wealthier is higher than the poorer