Wealth Inequality and Return Heterogeneity During the COVID-19 Pandemic

58 Pages Posted: 22 Nov 2021

See all articles by Katya Kartashova

Katya Kartashova

Bank of Canada

Xiaoqing Zhou

Federal Reserve Banks - Federal Reserve Bank of Dallas

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2021

Abstract

Wealth inequality in the U.S., measured by the top 1% wealth share, experienced dramatic changes in the first year of the COVID-19 pandemic. Economic theory suggests that the key to understanding wealth inequality is heterogeneity in the return to net worth across households. To understand the dynamics of wealth inequality during the COVID-19 pandemic, we develop a novel methodology that allows us to estimate the returns to net worth for different groups of households at relatively high frequency. We show that portfolio heterogeneity and asset price movements are the main determinants of wealth returns and inequality, whereas saving-rate heterogeneity and within-class return differences played a minor role. As the stock market continued to outperform the housing market, the return of the wealthy has risen faster than that of other households, reinforcing the wealth concentration at the top. We also document a widening racial return gap between white and black households later in the pandemic. Nearly all of the racial differences in the wealth return, however, are explained by the differences in wealth, not by race itself. Whereas the previous literature has evaluated return heterogeneity and its implications for long-run wealth inequality in low-frequency data, our analysis suggests that return heterogeneity together with large asset price movements is also key to understanding short-run dynamics in wealth inequality.

Keywords: COVID-19, wealth inequality, asset prices, returns to wealth, heterogeneity, racial wealth gap

JEL Classification: D31, E21, G11, G51

Suggested Citation

Kartashova, Katya and Zhou, Xiaoqing, Wealth Inequality and Return Heterogeneity During the COVID-19 Pandemic (November 1, 2021). FRB of Dallas Working Paper No. 2114, Available at SSRN: https://ssrn.com/abstract=3967802 or http://dx.doi.org/10.24149/wp2114

Katya Kartashova (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

Xiaoqing Zhou

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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