Subsistence Consumption and Inflation Heterogeneity: Implications for Monetary Policy Transmission in a HANK Model

Abstract

We study the consequences of differing consumption baskets and inflation heterogeneity for monetary policy transmission. Using German data we show that low-income households use the vast majority of their expenditures for subsistence consumption, and that this price index exhibits the highest volatility over time. We develop a HANK model that incorporates these facts and find that differing consumption baskets have a weakening effect on the transmission of monetary policy.