Sovereign debt yields have undergone a historic decline over the last half century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk. We show that a model with sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the reduction in investment and output growth. Calibrations of the model post-COVID suggest that sovereign default risk may have returned.

What explains wealth and portfolio differences between black and white Americans? We find that disparities in economic factors explain portfolios well, but only partly explain the wealth gap. In a dynamic setting, economic factors often change optimal saving rates in ways that offset their effects on income and returns. Consequently, their net wealth effect is often limited, making the wealth gap harder to explain. We estimate that differences in income levels, income risk, family structures, mortality, health expenditures, property taxes, mortgage rates, and asset returns explain half of the differential between the racial wealth gap and the racial income gap.