Household balance sheet channels of monetary policy: A back of the envelope calculation for the euro area

Jiri Slacalek, Oreste Tristani, Giovanni L. Violante

Research output: Contribution to journalArticlepeer-review

23 Scopus citations


This paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures. We analyze several transmission mechanisms operating through direct, partial equilibrium channels—intertemporal substitution and net interest rate exposure—and indirect, general equilibrium channels—net nominal exposure, as well as wealth, collateral and labor income channels. The strength of these forces varies across households depending on their marginal propensities to consume, their balance sheet composition, the sensitivity of their own earnings to fluctuations in aggregate labor income, and the responsiveness of aggregate earnings, asset prices and inflation to monetary policy shocks. We quantify all these channels in the euro area by combining micro data from the HFCS and the EU-LFS with structural VARs estimated on aggregate time series. We find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross-country heterogeneity in these responses.

Original languageEnglish (US)
Article number103879
JournalJournal of Economic Dynamics and Control
StatePublished - Jun 2020

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics


  • Consumption
  • Euro area
  • Hand-to-mouth
  • Household balance sheets
  • Household heterogeneity
  • Housing
  • Inflation
  • Labor income
  • Marginal propensity to consume
  • Monetary policy
  • Wealth distribution


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