Macroprudential Policies and Inequalities in Europe: The Role of Household Portfolio Composition

We study the effects of macroprudential policies on income and wealth inequality across 18 Eurozone countries over the period 2000–2024. We focus on the financially constrained Wealthy Hand-to-Mouth households for whom the regulation changes are likely to be consequential. We present insights from a stylised two-economy incomplete-markets model where the heterogeneity in household portfolio composition shapes the effects on inequalities of borrower-based regulation. Using panel regressions and local projections, we test empirically the model's predictions that macroprudential policies matter for inequalities and their effects differ depending on the concentration of housing or pension assets in the Wealthy Hand-to-Mouth households' illiquid portfolios. The empirical findings underscore that in housing dominant economies, the reduction of the LTV ratio improves wealth inequalities in the short term through a collateral-leverage mechanism, whereas it persistently widens wealth disparities in pension-dominant economies through credit exclusion effects.