The Marginal Propensity to Consume in Heterogeneous Agent Models

Greg Kaplan and Giovanni Violante

No 17271, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: D15 D31 D52 E21 E62 E71 G51 (search for similar items in EconPapers)
Date: 2022-05
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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 (2021)
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