Factor decomposition of the wealth distribution in the euro area

Abstract

Economic policy often targets specific components of the household balance sheet such as policies supporting the financing of real estate or setting the interest rate. To understand the potential impact of these policy measures on the overall distribution of wealth, this paper investigates the link between components of wealth and the overall distribution of wealth, using factor decomposition methods. Applying methods from the literature and a new decomposition approach based on the recentered influence function, it uses the newly published data provided by the Eurosystem Household Finance and Consumption Survey. Specifically, the paper studies the (marginal) contributions of and the elasticity with respect to components of the household’s balance sheet for the euro area as a whole as well as for 15 euro area countries. We find some factors (such as wealth held in households’ main residence) to contribute a higher proportion to inequality while others (such as risky financial assets) display only a relatively weak contribution. In addition, elasticities reveal a diverging impact of different components on the wealth distribution. Furthermore, the relative contribution and the point elasticities of the components of total wealth differ across euro area countries, indicating regionally distinctive impacts of policy measures.