HOW INTEREST RATES INFLUENCE HAND-TOMOUTH CONSUMPTION PATTERNS

Antonio Cutanda and Juan A. Sanchis
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Antonio Cutanda: Universidad de Valencia, Valencia, Spain
Juan A. Sanchis: Universidad de Valencia and ERICES, Valencia, Spain

No 2513, Working Papers from Department of Applied Economics II, Universidad de Valencia

Abstract: In this paper, we investigate the heterogeneity in the intertemporal behaviour of Spanish households by estimating the intertemporal elasticity of substitution of consumption (IESC) across different groups of households. Using data from the Spanish Survey of Household Finances for the period 2002–2022, we categorise households based on their consumption patterns relative to income and wealth. Our findings show that most Spanish households react to changes in the real interest rate, with an estimated IESC of approximately 0.8 to 0.9. However, certain groups, specifically renters and individuals whose total wealth is less than two months of their labour income and whose expenditure exceeds their liquid wealth, exhibit a lower IESC, around 0.6 to 0.7, or display no reaction at all. These results support the hypothesis put forward by Aguiar et al. (2025) that hand-to-mouth consumers tend to have a higher IESC than the general population. Overall, our findings reinforce the view that monetary policy is an effective tool for influencing non-durable consumption.

Keywords: Euler Equation; Instrumental variables; Intertemporal Substitution for consumption; Panel data. (search for similar items in EconPapers)
JEL-codes: C23 C26 D12 D15 J22 (search for similar items in EconPapers)
Date: 2025-10
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