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How Interest Rates Influence Hand-Tomouth Consumption Patterns

Author

Listed:
  • Antonio Cutanda

    (Universidad de Valencia, Valencia, Spain)

  • Juan A. Sanchis

    (Universidad de Valencia and ERICES, Valencia, Spain)

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.

Suggested Citation

  • Antonio Cutanda & Juan A. Sanchis, 2025. "How Interest Rates Influence Hand-Tomouth Consumption Patterns," Working Papers 2513, Department of Applied Economics II, Universidad de Valencia.
    • Handle: RePEc:eec:wpaper:2513
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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