The reaction of consumption to an income shock is larger for households with less resources
19.06.2020
The 2017 wave of the Household Finance and Consumption Survey (HFCS/ISFF) included a question on consumption decisions after winning a lottery prize with an amount equal to the income received in a month. This is a way of assessing the propensity to consume out of a temporary and unexpected increase in income.
In general, the average propensity to consume is higher in countries with a higher percentage of “hand-to-mouth” households (those who are not able to afford one month of regular expenses from their income and liquid financial assets). Portugal is an exception to this pattern. Although in Portugal the percentage of “hand-to-mouth” households is higher than the euro area average, the propensity to consume of Portuguese households is among the lowest. This situation may be due to the fact that the debt service accounts for a high share of households’ income. Within each country, the results generally confirm that “hand-to-mouth” households are those whose consumption reacts more to an income shock. In Portugal, the propensity to consume is 37% for “hand-to-mouth” households and 32% for “not hand-to-mouth” households.
For further details see “Propensity to consume in Portugal and the euro area: an analysis with survey data” in Banco de Portugal Economic Bulletin, May 2020.
Prepared by Sónia Costa and Luísa Farinha. The analyses, opinions and findings expressed above represent the views of the author and not necessarily those of the Banco de Portugal or the Eurosystem.
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