Who Gains When Interest Rates Fall?

We study the interest-rate sensitivity of household wealth in a realistic life-cycle model. The model predicts that middle-aged and wealthier households should hold more long-term assets, as observed in the US data. Consequently, optimal portfolio rules imply that falling interest rates increase wealth inequality, while rising rates reduce inequality, consistent with historical experience. However, these long-run shifts in wealth inequality are largely offset by changes in the valuation of human capital and Social Security benefits, mitigating the passthrough of interest-rate fluctuations to expected lifetime consumption.