Disentangling the distributional effects of financial shocks in the euro area

We study how financial shocks affect the income distribution in the euro area. Using survey-based microdata from 16 countries and a functional pooled panel VAR, we trace impulse responses of the full income distribution. Positive financial shocks increase gross market income inequality: upper-tail incomes rise persistently, whereas lower-tail incomes weaken on impact and recover gradually, even as the mass at zero income declines. Decomposing income into property and labor components reveals two transmission channels. Property income responds quickly, consistent with asset-price revaluation and concentrated financial asset holdings. Labor income responds more gradually and persistently, consistent with broader labor-market adjustment in margins and composition. We also document asymmetries: financial expansions raise inequality, whereas financial contractions initially compress top incomes. The asymmetry is strongest for financial asset income.