Latent Heterogeneity in the Marginal Propensity to Consume

83 Pages Posted: 20 Nov 2019

See all articles by Daniel J. Lewis

Daniel J. Lewis

Federal Reserve Banks - Federal Reserve Bank of New York

Davide Melcangi

Federal Reserve Banks - Federal Reserve Bank of New York

Laura Pilossoph

Federal Reserve Banks - Federal Reserve Bank of New York; University of Chicago - Department of Economics

Date Written: November 2019

Abstract

We estimate the distribution of marginal propensities to consume (MPCs) using a new approach based on the fuzzy C-means algorithm (Dunn 1973; Bezdek 1981). The algorithm generalizes the K-means methodology of Bonhomme and Manresa (2015) to allow for uncertain group assignment and to recover unobserved heterogeneous effects in cross-sectional and short panel data. We extend the fuzzy C-means approach from the cluster means case to a fully general regression setting and derive asymptotic properties of the corresponding estimators by showing that the problem admits a generalized method of moments (GMM) formulation. We apply the estimator to the 2008 tax rebate and household consumption data, exploiting the randomized timing of disbursements. We find a considerable degree of heterogeneity in MPCs, which varies by consumption good, and provide evidence on their observable determinants, without requiring ex ante assumptions about such relationships. Our aggregated heterogeneous results suggest that the partial equilibrium consumption response to the stimulus was twice as large as what is implied by homogeneous estimates.

Keywords: marginal propensity to consume, consumption, tax rebate, heterogeneous treatment effects, machine learning, clustering, C-means, K-means

JEL Classification: D12, D91, E21, E32, E62

Suggested Citation

Lewis, Daniel J. and Melcangi, Davide and Pilossoph, Laura, Latent Heterogeneity in the Marginal Propensity to Consume (November 2019). FRB of New York Staff Report No. 902, 2019, Available at SSRN: https://ssrn.com/abstract=3489434 or http://dx.doi.org/10.2139/ssrn.3489434

Daniel J. Lewis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Davide Melcangi

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Laura Pilossoph

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

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