European Central Bank publishes research on safe-asset expansion lowering wealth inequality despite higher asset prices

The European Central Bank has published Working Paper No 3162 by Xitong Hui under the ECB Lamfalussy Fellowship Programme analysing how rising asset prices interact with wealth inequality, interest rates and welfare. Using a heterogeneous-agent general equilibrium framework, the paper argues that expanding the supply of safe assets can reduce wealth inequality and improve welfare for less-wealthy savers even as risky asset valuations rise. The model distinguishes entrepreneurs, who hold risky private capital subject to idiosyncratic risk and binding “skin-in-the-game” constraints, from traditional savers, who mainly hold safe assets and diversified public equity. Endogenous feedback from entrepreneurs’ higher returns and higher saving can generate rising valuations alongside falling safe rates and rising wealth concentration without clear welfare gains. By contrast, “safe-asset expansions” through financial innovation, public debt or a stable public-equity bubble reduce entrepreneurs’ undiversified risk exposure, compress risk premia and raise the safe rate, slowing entrepreneurial wealth accumulation and shifting wealth towards savers. Welfare effects are asymmetric: savers benefit unambiguously, while entrepreneurs’ welfare is state-dependent, with losses when their wealth share is low but gains once they are sufficiently wealthy. The ECB notes that the paper reflects the author’s views and does not necessarily represent those of the ECB or the Eurosystem.