Government Investment Shocks and Wealth Inequality in the Euro Area: A Local Projections Approach

Ongoing debates in the literature suggest that public investment may affect the distribution of household wealth, yet evidence for the euro area remains limited. This thesis aims to examine how government investment shocks affect net wealth inequality and whether their effects depend on economic conditions. It combines quarterly euro-area Distributional Wealth Accounts with structurally identified investment shocks and estimates dynamic responses using local projections. The average response of the net wealth Gini does not provide robust evidence of a systematic effect. The estimates suggest, however, that the response varies with growth before the shock. Under weak growth, the estimated response points to a decline in wealth inequality; this pattern becomes less pronounced as growth rises. The balance-sheet results are consistent with this pattern: deposits held by the bottom half of the wealth distribution tend to increase, alongside improvements in their deposits and net wealth relative to the top decile. Overall, the results suggest that the distributional effects of government investment depend on initial growth conditions and are accompanied by changes in the liquid assets of less wealthy households.