Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/198979 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7619
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Incomplete markets models imply heterogeneous household savings behaviour which in turn generates pecuniary externalities via the interest rate. Conditional on differences in the processes determining household earnings for distinct groups in the population, these savings externalities may contribute to inequality. Working with an open economy heterogenous agent model, where the interest rate only partially responds to domestic asset supply, we find that differences in the earnings processes of British households with university and non-university educated heads entail savings externalities that increase wealth inequality between the groups and within the group of the non-university educated households. We further find that while the inefficiency effects of these externalities are quantitatively small, the distributional effects are sizeable.
Subjects: 
incomplete markets
productivity differences
savings externalities
JEL: 
E21
E25
H23
Document Type: 
Working Paper
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