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Working Paper

The Dynamics of the Racial Wealth Gap

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What drives the dynamics of the racial wealth gap? We answer this question using a dynamic stochastic general equilibrium heterogeneous-agents model. Our calibrated model endogenously produces a racial wealth gap matching that observed in recent decades along with key features of the current cross-sectional distribution of wealth, earnings, intergenerational transfers, and race. Our model predicts that equalizing earnings is by far the most important mechanism for permanently closing the racial wealth gap. One-time wealth transfers have only transitory effects unless they address the racial earnings gap, and return gaps only matter when earnings inequality is reduced.

Topics
Economic equity and inclusion
11.29.2022ISSN 2573-7953 WP 19-18ROriginal Paper WP 19-18DOI 10.26509/frbc-wp-201918r
Keywords Racial Inequality, Wealth Dynamics
JEL Classification Codes D31, D58, E21, E24, J7

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Aliprantis, Dionissi, Daniel R. Carroll, and Eric R. Young. 2022. “The Dynamics of the Racial Wealth Gap.” Federal Reserve Bank of Cleveland, Working Paper No. 19-18R. https://doi.org/10.26509/frbc-wp-201918r