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MPC heterogeneity and the dynamic response of consumption to monetary policy

Author

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  • Miguel Ampudia
  • Russell Cooper
  • Julia Le Blanc
  • Guozhong Zhu

Abstract

This paper studies how household financial choices affect the impact of monetary policy on consumption. Based on micro data from four major euro area countries, we estimate structural parameters to match moments related to asset market participation rates, portfolio shares and wealth-to-income ratios by education and country. The country specific distributions of the marginal propensity to consume out of income and financial wealth are not degenerate, reflecting, among other factors, costs to both asset market participation and portfolio adjustment. Due to the heterogeneity in consumption responses, monetary policy, operating through its effects on household income and asset market returns, has a differential impact on individuals within and across countries. Generally, poor households respond more to the income variations produced by monetary policy innovations while rich households respond more to policy-induced variations in stock returns. Monetary policy has a larger impact on consumption in Italy and Spain compared to France and Germany. An extension of the model linking mortgage payments to monetary policy strengthens these findings.

Suggested Citation

  • Miguel Ampudia & Russell Cooper & Julia Le Blanc & Guozhong Zhu, 2023. "MPC heterogeneity and the dynamic response of consumption to monetary policy," BIS Working Papers 1102, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1102
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    References listed on IDEAS

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    1. Fatih Guvenen, 2009. "An Empirical Investigation of Labor Income Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 58-79, January.
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    Cited by:

    1. Winfried Koeniger & Peter Kress, 2024. "The Effect of Unconventional Fiscal Policy on Consumption -New Evidence based on Transactional Data," Swiss Finance Institute Research Paper Series 24-58, Swiss Finance Institute.
    2. Bertrand Garbinti & Pierre Lamarche & Frédérique Savignac, 2024. "Wealth Heterogeneity and the Marginal Propensity to Consume out of Wealth," Working papers 962, Banque de France.
    3. Masuda, Kazuto, 2024. "The Special Theory of Employment, Exchange Rate, and Money With the Focus on Inflation and Technological Progress," SocArXiv nxshd, Center for Open Science.
    4. Andrea Boitani & Lorenzo Di Domenico & Giorgio Ricchiuti, 2024. "Monetary policy and inequality: an heterogenous agents’ approach," DISCE - Working Papers del Dipartimento di Economia e Finanza def133, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

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    More about this item

    Keywords

    heterogeneity; marginal propensity to consume; monetary policy;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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