Fiscal Policy and MPC Heterogeneity

Tullio Jappelli () and Luigi Pistaferri

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We use responses to survey questions in the 2010 Italian Survey of Household Income and Wealth that ask consumers how much of an unexpected transitory income change they would consume. We find that the marginal propensity to consume (MPC) is 48 percent on average, and that there is substantial heterogeneity in the distribution. We find that households with low cash-on-hand exhibit a much lower MPC than affluent households, which is in agreement with models with precautionary savings where income risk plays an important role. The results have important implications for the evaluation of fiscal policy, and for predicting household responses to tax reforms and redistributive policies. In particular, we find that a debt-financed increase in transfers of 1 percent of national disposable income targeted to the bottom decile of the cash-on-hand distribution would increase aggregate consumption by 0.82 percent. Furthermore, we find that redistributing 1% of national disposable from the top to the bottom decile of the income distribution would boost aggregate consumption by 0.1%.

Keywords: Marginal Propensity to Consume; Fiscal Policy; Consumption Heterogeneity (search for similar items in EconPapers)
JEL-codes: D91 E21 (search for similar items in EconPapers)
Date: 2012-11-15, Revised 2012-12-18
New Economics Papers: this item is included in nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in American Economic Journal: Macroeconomics, 2014, 6(4), 107-36

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Related works:
Journal Article: Fiscal Policy and MPC Heterogeneity (2014)
Working Paper: Fiscal Policy and MPC Heterogeneity (2013)
Working Paper: Fiscal policy and MPC heterogeneity (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:325

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