The Relationship between Household Wealth and Financial Vulnerability in the Post-communist Countries of the Euro Area

Abstract

The paper investigates the relationship between household wealth and financial vulnerability in the euro area member countries using data from the European Union Household Finance and Consumption Survey (HFCS). The instrumental variable regression model based on the two-stage least square method was used to elicit the role of household financial vulnerability in wealth accumulation. To consider different historical development and implementing social policies, the analysis considers the household location (post-communist countries according to the Warsaw Treaty and other European countries with a core in Western Europe). The analysis results emphasise the positive relationship between households' wealth accumulation and financial vulnerability represented by household indebtedness. Additional variables reflecting the households' socio-economic and demographic characteristics are statistically significant, too. Debt service-to-income ratio, statuses of employment (employed and self-employed), and age of the reference person squared were driving forces of wealth accumulation, while age of the reference person, number of dependent children, employment status (retired, other), and geographical location lower the level of household wealth.