Most econometric policy models at central banks and elsewhere use an aggregate consumption function based on textbook theory. This assumes that the ‘representative household’ owns only a liquid asset, proxied by net worth, and never faces borrowing or liquidity constraints or transactions costs. This is inconsistent with the modern view of heterogeneous agent behaviour under uncertainty in incomplete markets. Based on data from 1980 to 2019, the conventional formulation for an aggregate consumption function for Italy is strongly rejected. Easier credit conditions raise consumption relative to income. The results show that the marginal propensities to consume out of household deposits and semi-liquid financial assets such as T-bills and mutual funds are greater than for less liquid assets. A significant positive effect from housing wealth is partly offset by the negative effect of affordability measured by the house price-to-income ratio. Implications for monetary transmission differ radically from those of the conventional form. The surge in liquid deposits in the pandemic helped sustain post-pandemic spending by more than implied by typical policy models.