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Estimating the marginal propensity to consume using the distributions of income, consumption, and wealth

Jonathan Fisher, David S. Johnson, Timothy M. Smeeding and Jeffrey Thompson ()

Journal of Macroeconomics, 2020, vol. 65, issue C

Abstract: Studies of economic inequality almost always separately examine income, consumption, and wealth inequality, and hence, miss the important synergy amongst the three measures explicit in the life-cycle budget constraint. These joint distributions, however, are important in evaluating macroeconomic impacts of changes in income because the response may differ across the wealth distribution. This heterogeneity in the response to income changes can have significant impact on the effectiveness of government fiscal policy. Using the Panel Study of Income Dynamics from 1999–2013, we examine how the marginal propensity to consume (MPC) differs across the wealth distribution. We find that the MPC is lower at higher wealth quintiles, indicating that low wealth households cannot smooth consumption as much as other households. This implies that increasing wealth inequality likely reduces aggregate consumption, which, in turn, could limit economic growth.

Keywords: Marginal propensity to consume; Wealth distribution; Inequality (search for similar items in EconPapers)
JEL-codes: D15 D30 E21 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:65:y:2020:i:c:s0164070420301440

DOI: 10.1016/j.jmacro.2020.103218

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