Because the wealthy hand-to-mouth have little liquid wealth they react strongly to transitory income shocks and therefore have high MPCs.
Violante further shows Greg Kaplan that models featuring wealthy hand-to-mouth (i.e. with one liquid asset and one illiquid asset) yield aggregate responses to fiscal shocks one order of magnitude higher than standard one-asset models, consistent with empirical evidence.
[8] They argue that monetary policy operates mostly via general equilibrium effects on the labor market, instead of the standard intertemporal substitution channel.
[9] This is due to a sizable share of households exhibiting high MPCs, whose spending behavior reacts strongly to changes in disposable income.
As Ricardian equivalence fails in HANK models, the reaction of the fiscal authority to a monetary shock is key to determine the overall macroeconomic response.