Abstract
This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a financial asset and housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across the countries, and within countries by household characteristics such as age, housing tenure, and asset positions. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission within the euro area.
Highlights
Differences in household finances are large across the euro area
We find that the non-housing consumption responses to unexpected changes in the real interest rate, implied by the model, are quite different across euro-area countries
In our experiments we find amplification of the consumption responses in the considered euro area countries if, for example, a decrease in the real interest rate is accompanied by an increase in the relative house price
Summary
Differences in household finances are large across the euro area. Table 1 shows that less than 20% of households are renters in Spain. This paper analyzes the consequences of the observed differences in household portfolios for the responses of non-housing consumption to changes in the real interest rate and relative house prices.
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