The Distribution of Wealth and the Marginal Propensity to Consume
34 Pages Posted: 20 Mar 2014
Date Written: March 5, 2014
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: Suggested Citation