Wealth Inequality Dynamics in Macroeconomic Models

Macroeconomic models have evolved from representative-agent frameworks to rich heterogeneous-agent settings that trace the distribution of wealth across households differing in income, preferences, risk and bequest motives. Continuous-time formulations translate canonical models into systems of partial differential equations, yielding analytic insights into consumption and saving behaviour at different wealth levels and, in special cases, closed-form wealth distributions. Advances in numerical algorithms now allow efficient computation of both stationary equilibria and transition dynamics. Complementary simulation-based and agent-based approaches extend this analysis to calibrated, data-driven environments, capturing the roles of uncertainty, returns-related factors and social mobility. Empirical and theoretical work emphasises the powerful influence of return on capital, private savings rates, intergenerational linkages and income persistence in generating heavy-tailed wealth distributions, often approximated by Pareto laws at the top end. Recent micro-level investigations of the gap between real returns on wealth and aggregate growth (r > g) reveal substantial heterogeneity across the distribution and demonstrate that the full distribution of return-growth differentials improves predictions of future inequality. These combined strands inform policy debates on taxation, inheritance rules and financial regulation, highlighting both the global significance of rising concentration and the practical levers available to moderate wealth stratification.

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Wealth Inequality Dynamics in Macroeconomic Models publication trend

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Technical terms

Heterogeneous agent model: A macroeconomic framework featuring households with diverse incomes, preferences and constraints to capture distributional dynamics.

Partial differential equation: A mathematical relation involving derivatives with respect to continuous variables, used to characterise wealth evolution in continuous time.

Pareto distribution: A heavy-tailed probability distribution commonly applied to describe the upper tail of wealth and income distributions.

Agent-based model: A computational simulation of interacting agents, used to study aggregate phenomena such as inequality and mobility.

r > g differential: The condition in which the rate of return on capital exceeds the economy’s growth rate, a key driver of long-run wealth concentration.

References

1. Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach. The Review of Economic Studies (2021).
2. Wealth Inequality and Intergenerational Links. The Review of Economic Studies (2004).
3. Wealth inequality and social mobility: A simulation-based modelling approach. Journal of Economic Behavior & Organization (2022).
4. The dynamics of Pareto distributed wealth in a small open economy. Economic Theory (2022).
5. A micro perspective on r > g. Economica (2023).