Hand-to-mouth households in the eurosystem and the transmission of monetary policy

Official URL: https://dx.doi.org/10.1016/j.euroecorev.2026.105401

We revisit the question of the role of Hand-to-Mouth (HtM) households in monetary policy transmission across European countries, using the Household Finance and Consumption Survey (HFCS). Using European Central Bank (ECB) monetary shocks and panel local projections, we find that the aggregate output response of countries with higher HtM ratios is less pronounced following 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 economies with a higher share of HtM households.