Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/327105 
Year of Publication: 
2025
Series/Report no.: 
DICE Discussion Paper No. 427
Publisher: 
Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE), Düsseldorf
Abstract: 
Households differ in their consumption baskets and inflation rates along the wealth and income distribution. We use German data to show that subsistence consumption is a main driver of these differences: the share of subsistence consumption in overall consumption is significantly higher for households at the lower end of the wealth and income distribution. We construct a price index for subsistence consumption and show that this price index exhibits larger volatility than the price indices constructed for the average consumption basket and the basket of households with average and high income. We then set up a Heterogeneous Agent New Keynesian (HANK) model that incorporates these facts to analyze the consequences of different consumption baskets and inflation heterogeneity for monetary policy transmission. We find that heterogeneous consumption baskets across households weaken monetary policy transmission. This is due to the heterogeneous responses of inflation rates to monetary policy shocks across households, larger labor supply heterogeneity, and a novel indirect transmission channel of monetary policy operating through the real value of subsistence consumption.
Subjects: 
HANK model
inflation heterogeneity
inequality
monetary policy transmission
subsistence consumption
JEL: 
E12
E21
E31
E32
E52
ISBN: 
978-3-86304-426-8
Document Type: 
Working Paper

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