Subjective Uncertainty and the Marginal Propensity to Consume

Gizem Kosar and Davide Melcangi

No 1148, Staff Reports from Federal Reserve Bank of New York

Abstract: Earnings uncertainty is central to most heterogeneous-household models. Yet, there is surprisingly little evidence on how subjective uncertainty is related to consumption behavior. Using unique data from the Survey of Consumer Expectations, we show that the marginal propensity to consume (MPC) is increasing and concave in individual specific earnings growth uncertainty. In the workhorse consumption–savings model, augmented with risk heterogeneity, MPCs decline with earnings uncertainty, contrary to the empirical evidence. We pinpoint which mechanisms, central to the model, create this disconnect and show how recently proposed deviations from the full-information rational expectations framework can reconcile theory with the empirical findings.

Keywords: marginal propensity to consume; consumption; subjective uncertainty; heterogeneity (search for similar items in EconPapers)
JEL-codes: D12 D84 E21 (search for similar items in EconPapers)
Pages: 86
Date: 2025-04-01
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DOI: 10.59576/sr.1148

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