Abstract

How does the regulation of the financial sector impact household welfare and inequality? To answer this question, we build a macroeconomic model with banks, insurance/pension funds, heterogeneous households, asset market participation constraints, and endogenous asset price volatility. We develop a new deep learning methodology for characterizing global solutions to this class of macro-finance models. We show how asset price dynamics, financial stability, and wealth inequality all depend upon which investors are able to purchase assets in bad states of the world. In particular, allowing pension/insurance funds broad access to asset markets leads to greater stability at the business cycle frequency but exposes the household to other risks. Ultimately, the government faces complicated trade-offs between ensuring stability, lowering borrowing costs, and maintaining household equality.