03 December 2015

Voxeu: Distributional consequences of asset price inflation in the Eurozone

This column investigates the distributional effects associated with asset price increases. The findings show that house price increases lead to a significant decrease in net wealth inequality in the Eurozone, whereas equity price increases lead to a significant rise in inequality.

Central banks’ unconventional monetary policy measures tend to be accompanied by considerable asset price increases. Such asset price increases have potentially large distributional effects and therefore are receiving increasing attention amongst policymakers. With further unconventional monetary policy measures for the Eurozone being all but announced for the ECB’s December 2015 policy meeting, understanding and quantifying the distributional implications of asset price inflation for the Eurozone is important.

To simplify matters the columnr focuses on the distributional consequences associated with a canonical 10% price increase in three asset categories: equity prices, bond prices, and housing prices. Consideration of a canonical price increase is motivated by the fact that quantifying the actual asset price effects associated with unconventional policy measures tends to be difficult. 

While only a small set of Eurozone households benefits from bond and equity price increases, house price appreciations are more widespread among households. While the capital gains from bond price increases are approximately evenly spread across the household net wealth distribution, capital gains from equity price increases are concentrated predominantly among high net worth households. House prices lead to the largest gains amongst middle class and upper middle class households. As a result, bond price increases leave net wealth inequality unchanged, equity price increases amplify net wealth inequality, while house prices increases reduce wealth inequality.

It remains an open issue to what extent capital gains actually translate into welfare gains. If households have long investment horizons, capital gains may be partly or fully compensated by lower future holding period returns. Changes in net wealth inequality then overstate the utility effects associated with the documented capital gains.

Full column

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