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House Price Cycles, Wealth Inequality and Portfolio Reshuffling

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  • Clara Toledano

    (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, WIL - World Inequality Lab)

Abstract

Business cycle dynamics can shape the wealth distribution through asset price changes, saving responses, or a combination of both. This paper studies the implications of housing booms and busts for wealth inequality, examining two episodes over the last four decades in Spain. I combine fiscal data with household surveys and national accounts to reconstruct the entire wealth distribution and develop a new asset-specific decomposition of wealth ac- cumulation to disentangle the main forces behind wealth inequality dynamics (e.g., capital gains, saving rates). I find that the top 10% wealth share drops during housing booms, but the decreasing pattern reverts during busts. Differences in capital gains across wealth groups appear to be the main drivers of the decline in wealth concentration during booms. In contrast, persistent differences in saving rates across wealth groups and portfolio reshuf- fling towards financial assets among top wealth holders are the main explanatory forces behind the reverting evolution during housing busts. I show that the heterogeneity in saving responses is largely driven by differences in portfolio adjustment frictions across wealth groups and that tax incentives can exacerbate this differential behavior. Using a novel personal income and wealth tax panel, I explore the role of tax incentives exploiting quasi-experimental variation created by a large capital income tax reform in a differences- in-differences setting. I find that capital income tax cuts, largely benefiting top wealth holders, explain on average 60% of the increase in the top 10% wealth share during the re- cent housing bust. These results provide novel empirical evidence to enrich macroeconomic theories of wealth inequality over the business cycle.

Suggested Citation

  • Clara Toledano, 2020. "House Price Cycles, Wealth Inequality and Portfolio Reshuffling," PSE Working Papers hal-02876979, HAL.
  • Handle: RePEc:hal:psewpa:hal-02876979
    Note: View the original document on HAL open archive server: https://hal-pjse.archives-ouvertes.fr/hal-02876979
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    References listed on IDEAS

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    Keywords

    Wealth distribution; wealth concentration; Spain; inequality; asset; housing; wealth tax;

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