The Marginal Propensity to Consume in Heterogeneous Agent Models

Greg Kaplan and Giovanni Violante
Additional contact information
Giovanni Violante: Princeton University

Working Papers from Princeton University. Economics Department.

Abstract: We conduct a systematic analysis of heterogeneous agent consumption-saving models to understand whether and how they can generate a large average marginal propensity to consume (MPC). One-asset models without ex-ante heterogeneity feature a trade-off between a high average MPC and a realistic level of aggregate wealth. One-asset models with additional heterogeneity in preferences or rates of return, or behavioral features, can generate high MPCs with the right amount of total wealth, but at the cost of an excessively polarized wealth distribution that understates the wealth held by households in the middle of the distribution. Two-asset models that include both liquid and illiquid assets can resolve these trade-offs without ex-ante heterogeneity or behavioral elements, although these additional features can improve the fit of the model in other dimensions. Across all models, the share and type of hand-to-mouth households is the most important factor that determines the level of the average MPC.

Keywords: Borrowing Constraints; Consumption; Income Risk; Hand-to-Mouth; Heterogeneity; Liquidity; Marginal Propensity to Consume; Market Incompleteness; Wealth Distribution (search for similar items in EconPapers)
JEL-codes: D15 D31 D52 E21 E62 E71 G51 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://violante.mycpanel.princeton.edu/Workingpape ... 16_GK_recompiled.pdf

Related works:
Journal Article: The Marginal Propensity to Consume in Heterogeneous Agent Models (2022)
Working Paper: The Marginal Propensity to Consume in Heterogeneous Agent Models (2022)
Working Paper: The Marginal Propensity to Consume in Heterogeneous Agent Models (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2021-9

Access Statistics for this paper

More papers in Working Papers from Princeton University. Economics Department. Contact information at EDIRC.
Bibliographic data for series maintained by Bobray Bordelon ().