Adam Smith Business School

Clara Martínez Toledano, Imperial College London

"House Price Cycles, Wealth Inequality and Portfolio Reshuffling"
Thursday, 16 March. 3 pm
Room 540 Main Building

Abstract

Business cycle dynamics can shape 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 accumulation to disentangle the main forces behind wealth inequality dynamics (e.g., capital gains, and 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 reshuffling 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 behaviour. 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 recent housing bust. These results provide novel empirical evidence to enrich macroeconomic theories of wealth inequality over the business cycle.

Bio

Clara is an Assistant Professor of Financial Economics at Imperial College Business School and Wealth Distribution Coordinator at WID.world. She is also a CEPR and CESifo Research Affiliate and a Research Fellow at the EU Tax Observatory. Her research interests are on household and public finance. Recent work focuses on understanding the determinants of wealth accumulation and wealth inequality dynamics within and across countries. Before joining Imperial, she was previously a Postdoctoral scholar at Columbia Business School.

---

For further information, please contact business-school-research@glasgow.ac.uk

We foster a positive and productive environment for seminars through our Code of conduct.

First published: 7 March 2023