Esteban Tisnés

Recent literature has highlighted that differences across countries in the share of Hand-to-Mouth households (HtM) are important for the transmission of aggregate shocks as well as monetary and fiscal policy. How can we explain cross-country differences in the share of hand-to-mouth households? In this paper, we first document significant heterogeneity in the share of HtM households across European countries. This heterogeneity is driven by large differences in the share of wealthy HtM households, who hold illiquid but no liquid wealth. On the contrary, the share of poor HtM, who hold neither liquid or illiquid wealth, is similar across countries. Second, we develop a two-asset life-cycle model with incomplete markets and uninsurable income risk and calibrate it to Spain. Through the lens of the model we study the role country differences in income risk, the life-cycle profile of earnings and retirement benefits. Although we report substantial differences across countries in mean income, risk and retirement benefits, results suggest that they cannot explain cross-country differences in the share of HtM by themselves. On the other hand, differences in financial conditions are able to explain, ceteris-paribus, 51% of the differences in HtM shares, by explaining 68% of W-HtM shares.

We causally identify how firms' surprises about the fiscal situation affect their inflation expectations and credibility in the central bank. While no treatment shifts the average one-year-ahead inflation expectation, they produced sizable, systematic and heterogeneous movements in the distribution. Firms that had underestimated the debt-to-GDP ratio revised inflation expectations upward, whereas over-estimators revised them downward, so that the mean effect netted to zero. Beyond point expectations, treated firms reallocated subjective probability mass across scenarios to finance the fiscal deficit: the likelihood they assigned to orthodox deficit reduction rise and the likelihood of inflationary financing fall among initially pessimistic firms. These findings highlight how simple debt disclosures can reshape tail risks and policy beliefs even when short-run average inflation expectations do not move.