The Macroeconomics of Housing and the Dynamics of Wealth Inequality

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Abstract: This paper studies the dynamics of wealth inequality and agent-specific welfare in a growing economy with a housing sector. We employ a frictionless housing & macro model that is designed to think long term. This model allows us to derive analytical results for the direct effect of rising real rents on the dynamics of wealth inequality and welfare. The direct effect of rising rents is a reduction in wealth inequality and a decrease in welfare. In general equilibrium these effects are ambiguous, depending on the source for rising rents. The calibrated model shows that a steeper time path for rents leads to less wealth inequality and lower welfare for all households. Status concerns for housing amplify the dynamics in wealth inequality by widening the differences in saving rates. They also magnify the differences in welfare across agents by enlarging the differences in household-specific price indices.