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.
First version, November 23, 2022
D31: Personal Income, Wealth, and Their Distributions
D58: Computable and Other Applied General Equilibrium Models
E21: Macroeconomics: Consumption; Saving; Wealth
E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
J70: Labor Discrimination: General