Households with insufficient liquid assets: Consumption responses to income changes

The fraction of households living with insufficient liquid assets is important to understand consumption responses to income changes. Using harmonized data for 23 European countries over 2010–2023 from the Household Finance and Consumption Survey, we investigate the prevalence and characteristics of hand-to-mouth (HtM) households, grouped into non-HtM, poor HtM and wealthy HtM. Our findings indicate significant variability across countries in the shares of HtM households, with the majority in all countries being wealthy households with sizeable wealth in housing and other real estates. We also find that poor HtM households exhibit the highest marginal propensity to consume (MPC), whereas wealthy HtM households display a negative association with the MPC. The relationship for poor HtM households seems to be driven by unobserved factors, whereas the relationship with wealthy HtM is negative and significant even controlling for unobserved preference heterogeneity. These results align with life-cycle models with liquidity constraints and precautionary savings.