The Marginal Propensity to Consume in Heterogeneous Agent Models
58 Pages Posted: 27 Apr 2022
There are 4 versions of this paper
The Marginal Propensity to Consume in Heterogeneous Agent Models
The Marginal Propensity to Consume in Heterogeneous Agent Models
The Marginal Propensity to Consume in Heterogeneous Agent Models
The Marginal Propensity to Consume in Heterogeneous Agent Models
Date Written: April 25, 2022
Abstract
What model features and calibration strategies yield a large average marginal propensity to consume (MPC) in heterogeneous agent models? Through a systematic investigation of models with different preferences, dimensions of ex-ante heterogeneity, income processes and asset structure, we show that the most important factor is the share and type of hand-to-mouth households. One-asset models either feature a trade-off between a high average MPC and a realistic level of aggregate wealth, or generate an excessively polarized wealth distribution that vastly understates the wealth held by households in the middle of the distribution. Two-asset models that include both liquid and illiquid assets can resolve this tension with a large enough gap between liquid and illiquid returns. We discuss how such return differential can be justified from the perspective of theory and data.
Keywords: Borrowing Constraints, Consumption, Hand-to-Mouth, Heterogeneity, Income Risk, Liquidity, Marginal Propensity to Consume, Market Incompleteness, Precautionary Saving, Wealth Distribution
JEL Classification: D15, D31, D52, E21, E62, E71, G51
Suggested Citation: Suggested Citation