The Marginal Propensity to Consume during the COVID-19 Pandemic: Evidence from Thailand and Vietnam

Abstract

In evaluating surveys conducted in Thailand and Vietnam during the COVID-19 pandemic, we find that the marginal propensity to consume is significantly larger for positive than for negative income shocks. This result contradicts a prediction from the lifecycle permanent income model with borrowing constraints as well as empirical evidence from industrialized countries. However, our finding is consistent with Kahneman and Tversky’s prospect theory, according to which the combination of income uncertainty and loss aversion can induce households to react more strongly to positive than to negative shocks.

Keywords: Marginal propensity to consume (MPC), Unanticipated income shocks, COVID-19, Thailand, Vietnam

JEL Classification: E62, E71, D12, D83, H31