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

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  • Okan Akarsu
  • Emrehan Aktug
  • Muserref Kucukbayrak

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.

Suggested Citation

  • Okan Akarsu & Emrehan Aktug & Muserref Kucukbayrak, 2025. "Hand-to-Mouth Households in the Eurosystem and the Transmission of Monetary Policy," Working Papers 2506, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:2506
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    Keywords

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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