Household Heterogeneity and Monetary Policy Transmission in the Czech Economy

This paper studies the transmission of monetary policy in the Czech economy through the lens of household heterogeneity. Standard macroeconomic models often rely on representative agents, while real-world households differ in income, wealth, liquidity constraints and balance-sheet exposures. These differences are particularly relevant in the Czech Republic, where household wealth is highly concentrated and housing constitutes the dominant component of household portfolios. We therefore apply a HANK-type decomposition framework to a post-transition, high-home-ownership economy where wealth concentration makes the upper tail of the wealth distribution central to understanding balance-sheet channels. The framework quantifies how changes in interest rates affect household consumption through five channels: intertemporal substitution, net interest rate exposure, income, the Fisher effect, and capital gains. The results reveal substantial heterogeneity in the strength and composition of these channels across household income and wealth groups: intertemporal substitution dominates for non-hand-to-mouth households, income matters more for liquidity-constrained households, and capital gains remain non-negligible despite a conservative calibration of housing wealth effects. Overall, accounting for household heterogeneity more than doubles the simulated consumption response relative to a representative-agent benchmark and brings the model-implied response close to empirical estimates of the impact of a monetary policy shock obtained using local projections. The findings suggest that representative-agent frameworks may understate the importance of labour-income and housing-wealth channels in monetary policy transmission.