New paper “House Price Cycles, Wealth Inequality and Portfolio Reshuffling”

Business cycle dynamics can shape the wealth distribution through asset price changes, saving responses, or a combination of  both. This working paper by Clara Martinez Toledano  studies the implications of housing booms and busts for wealth inequality, examining two episodes over the last four decades in Spain. She combines fiscal data with household surveys and national accounts, to reconstruct the entire wealth distribution and develop a new asset-specific decomposition of wealth accumulation to disentangle the main forces behind wealth inequality dynamics (e.g., capital gains, saving rates).

Results show 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 recent housing bust. These results provide novel empirical evidence to enrich macroeconomic theories of wealth inequality over the business cycle.