Households with insufficient liquid assets: Consumption responses to income changes

Abstract

The fraction of households living with insufficient liquid assets is important to understand consumption responses to income changes. Using harmonized data for 23 European countries over 2010--2023 from the Household Finance and Consumption Survey, we investigate the consumption responses to income changes of hand-to-mouth (HtM) households, grouped into non-HtM, poor HtM and wealthy HtM. Our findings indicate significant variability across countries in the shares of HtM households, with the majority in all countries being wealthy households with sizeable wealth in housing and other real estates. By examining the marginal propensity to consume (MPC) to hypothetical shocks across these households, we find that poor HtM households exhibit the highest MPC, whereas wealthy HtM households display a negative association with the MPC. The relationship for poor HtM households seems to be driven by unobserved factors, whereas the relationship with wealthy HtM is negative and significant even controlling for unobserved preference heterogeneity and households who switch their status. These consumption responses align with life-cycle models with liquidity constraints and precautionary savings.