Uncertain Expenses and the Short-Run Transmission of Monetary Policy (Job Market Paper)


In this paper, I study the importance of uncertain expenses for households’ savings and the short-run response to monetary policy. Using data from the Consumer Expenditure Survey (CEX), I classify a group of uncertain expenditure items representing 14.5% of total expenses and document that these uncertain expenses drive 41.8% of the short-run consumption response to monetary policy shocks. I develop a heterogeneous-agent incomplete markets model with two assets, money and bonds, where households use the two assets to self-insure against income and expenditure uncertainty. A timing friction in the portfolio choice problem and frictions in the goods market lead households to hold extra liquidity relative to their total consumption level. I show that self-insurance motives against expenditure risk imply a novel direct channel for the transmission of monetary policy to consumption through households’ optimal portfolio rebalancing in response to changes in the policy rate. In addition, the model generates concentration in the distribution of money holdings consistent with the data, a feature hard to reconcile with traditional transaction motives for money demand.

Mauricio Torres Ferro
Mauricio Torres Ferro
PhD Candidate in Economics

My research interests include macroeconomics with heterogeneous agents and monetary policy.