Hand-to-Mouth Households in the Eurosystem and the Transmission of Monetary Policy

Okan Akarsu, Emrehan Aktug and Muserref Kucukbayrak

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

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 (search for similar items in EconPapers)
JEL-codes: E12 E24 E31 E52 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:2506

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