The Marginal Propensity to Consume in Heterogeneous Agent Models

58 Pages Posted: 27 Apr 2022

See all articles by Greg Kaplan

Greg Kaplan

University of Chicago - Department of Economics; Princeton University

Giovanni L. Violante

New York University (NYU) - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

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

Kaplan, Greg and Violante, Giovanni L., The Marginal Propensity to Consume in Heterogeneous Agent Models (April 25, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-56, Available at SSRN: https://ssrn.com/abstract=4094188 or http://dx.doi.org/10.2139/ssrn.4094188

Greg Kaplan (Contact Author)

University of Chicago - Department of Economics ( email )

1126 E. 59th St
Chicago, IL 60637
United States

Princeton University

Giovanni L. Violante

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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