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The distribution of wealth and the marginal propensity to consume

Christopher Carroll, Jiri Slacalek () and Kiichi Tokuoka ()

No 1655, Working Paper Series from European Central Bank

Abstract: We present a macroeconomic model calibrated to match both microeconomic and macroeconomic evidence on household income dynamics. When the model is modified in a way that permits it to match empirical measures of wealth inequality in the U.S., we show that its predictions (unlike those of competing models) are consistent with the substantial body of microeconomic evidence which suggests that the annual marginal propensity to consume (MPC) is much larger than the 0.02_0.04 range implied by commonly-used macroeconomic models. Our model also (plausibly) predicts that the aggregate MPC can differ greatly depending on how the shock is distributed across categories of households (e.g., low-wealth versus high-wealth households). JEL Classification: D12, D31, D91, E21

Keywords: consumption dynamics; microfoundations; MPC; wealth inequality (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-dge and nep-pbe
Note: 1111765
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Journal Article: The distribution of wealth and the marginal propensity to consume (2017) Downloads
Working Paper: The Distribution of Wealth and the Marginal Propensity to Consume (2014) Downloads
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