The Distribution of Wealth and the Marginal Propensity to Consume

34 Pages Posted: 20 Mar 2014

See all articles by Christopher D. Carroll

Christopher D. Carroll

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER)

Jiri Slacalek

European Central Bank (ECB)

Kiichi Tokuoka

Ministry of Finance - Japan

Date Written: March 5, 2014

Abstract

We present a macroeconomic model calibrated to match both microeconomic and macroeconomic evidence on household income dynamics. When the model is modified in a way that permits it to match empirical measures of wealth inequality in the U.S., we show that its predictions (unlike those of competing models) are consistent with the substantial body of microeconomic evidence which suggests that the annual marginal propensity to consume (MPC) is much larger than the 0.02-0.04 range implied by commonly-used macroeconomic models. Our model also (plausibly) predicts that the aggregate MPC can differ greatly depending on how the shock is distributed across categories of households (e.g., low-wealth versus high-wealth households).

Keywords: MPC, wealth inequality, consumption dynamics, microfoundations

JEL Classification: D12, D31, D91, E21

Suggested Citation

Carroll, Christopher D. and Slacalek, Jiri and Tokuoka, Kiichi, The Distribution of Wealth and the Marginal Propensity to Consume (March 5, 2014). ECB Working Paper No. 1655, Available at SSRN: https://ssrn.com/abstract=2404862

Christopher D. Carroll (Contact Author)

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States
410-516-7602 (Phone)
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jiri Slacalek

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Kiichi Tokuoka

Ministry of Finance - Japan ( email )

3-1-1 Kasumigaseki
Chiyoda-ku
Tokyo, 100-8940
Japan

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