The Marginal Propensity to Consume in Heterogeneous Agent Models
58 Pages Posted: 27 Apr 2022
Date Written: April 25, 2022
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