The effect of monetary policy on household consumption expenditures in Portugal: A decomposition of the transmission channel

We follow Slacalek et al. (2020) monetary transmission decomposition approach to investigate the effects of monetary policy shocks on household consumption expenditures in Portugal since joining the euro area. Extending their analysis to Portugal, we quantify the monetary policy transmission channels using a combination of micro-level household data from the 3rd wave of the Household Finance and Consumption Survey and structural vector autoregressions estimated using aggregate-level data and identified using high-frequency data around monetary policy meetings. We find that the wealthy hand-to-mouth households’ consumption has the most significant reaction to monetary shocks because of extensive housing wealth and net interest rate exposure channels. In addition, due to its large size as a group in the Portuguese economy, we find that the wealthy hand-to-mouth households’ consumption response explains why the aggregate consumption reacts more to monetary shocks in Portugal than in other European countries.