MPC Heterogeneity in Europe: Sources and Policy Implications

This paper studies the implications of household financial choices for the effects of monetary policy on consumption. Based on data from four major euro area countries, the paper estimates the key structural parameters using a simulated method of moments approach to match moments related to asset market participation rates, portfolio shares and wealth to income ratios by education and country. The policy functions based upon the estimation are used to characterize the distributions of the marginal propensity to consume across heterogenous households for each of the four countries. Due to this 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.