Some remarks about distributional effects As long as assets are unevenly spread across the population, shifts in their prices will have redistributive effects. Let me now say something about what those might have been. I’ll make only a few, and very broad points. First, as regards the distribution of wealth, one of the main sources of unevenness is age. There is certainly considerable variation within age groups. In Chart 7, a snapshot taken from the ONS’s first Wealth and Asset Survey (2006), the vertical lines are interquartile ranges for each 10-year age bracket. Among households headed by 45–54 year olds, for example, those 25% from the top had over £ more in net wealth than those 25% from the bottom of the distribution. But there is also significant variation across age groups. Even relatively wealthy 25-year-olds have significantly less in the way of net assets than the average 50-year-old. This means that, during the first phase of the decline in real rates, when all asset prices were rising, it was generally older people who benefited the most. Anyone who, in the mid-1990s, happened already to own a house, or whose pension was already well funded, would have benefited materially from these trends. Chart 8 plots the age profile of net wealth in 1995 versus that a decade later.11 It steepened considerably. 8  Eggertson and Krugman (2012) develop a model where deleveraging pressure has very protracted effects on (ex ante) saving and on equilibrium real interest rates.
In the UK, for example, there was a commonly held view in the mid-1990s that, as long as the economy was operating at potential and inflation was on target, real interest rates would necessarily have to settle at a rate of 3% or so in real terms, roughly their average over the previous few years. This would imply a “neutral” nominal rate of close to 6%. “Neutral” doesn’t mean constant, however. It means the level of interest rates that, across the world, ensures the supply and demand for finance – desired levels of saving and investment – are brought into line3 (Chart 3). 2  The blue line is actually E/V, where E is earnings and V the total value of the firm, net debt as well as equity. Unlike E/P, and at least if the Modigliani-Miller neutrality result applies, E/V is invariant to changes in leverage. For a given total value V, higher leverage raises earnings per share and the E/P ratio. 3  I’ve been a bit imprecise with terminology here, using “natural”, “equilibrium” and “neutral” interchangeably. By the first two I mean the real short-term interest rate that would prevail if prices and wages were fully flexible  2  BIS central bankers’ speeches  Chart 3 Stylised supply and demand for finance  And in principle, any number of things – any number of real economic disturbances – can move that rate around.