Hand-to-Mouth Households in the Eurosystem and the Transmission of Monetary Policy
| Title: |
Hand-to-Mouth Households in the Eurosystem and the Transmission of Monetary Policy |
|
|---|---|---|
|
Number: |
25/06 |
|
|
Author(s): |
Okan Akarsu, Emrehan Aktuğ, Müşerref Küçükbayrak |
|
|
Language: |
English |
|
|
Date: |
July 2025 |
|
|
Abstract: |
We document hand-to-mouth (HtM) ratios for European countries using the Household Finance and Consumption Survey (HFCS) dataset and assess their role in monetary policy transmission. Using European Central Bank (ECB) monetary shocks and panel local projections, we find that countries with higher HtM ratios have a less pronounced response to monetary policy shocks compared to those with lower HtM ratios. This aligns with the predictions of heterogeneous agent New Keynesian models with both wage and price rigidity. When wages are stickier than prices, real wages for HtM agents may decline despite interest rate cuts, which hinders the demand boost typically expected from the New Keynesian Cross. Consequently, monetary policy is less effective in stimulating aggregate demand in countries with higher HtM ratios. | |
|
Keywords: |
HtM ratio, Monetary policy transmission, Wage and price rigidity, Heterogenous agents | |
|
JEL Codes: |
E12; E24; E31; E52 | |
