Heterogeneity in MPC Beyond Liquidity Constraints: The Role of Permanent Earnings

Jeanne Commault

SciencePo Working papers Main from HAL

Abstract: While MPCs are mostly known to decrease with liquid wealth, I show that they are also increasing in the permanent component of earnings. In a standard model, permanent earnings raise MPCs because they reduce the ratio of risk-free-liquid-wealth-to-risky-future-earnings, strengthening precautionary behavior. This can explain two documented facts: (i) people with high levels of liquid wealth still have significant MPCs; (ii) MPCs do not decrease with current earnings although, like liquid wealth, they increase available resources. This prediction holds in survey data. The effect is large enough to explain the stylized facts. Numerical simulations match the survey results and stylized facts.

Keywords: Marginal Propensity to Consume; Permanent Component of Earnings; Earnings Risk; Precautionary Saving; Standard Incomplete Market Model (search for similar items in EconPapers)
Date: 2025-04
New Economics Papers: this item is included in nep-dge
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03870685v3
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Working Paper: Heterogeneity in MPC Beyond Liquidity Constraints: The Role of Permanent Earnings (2025)
Working Paper: Heterogeneity in MPC Beyond Liquidity Constraints: The Role of Permanent Earnings (2025)
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