How Small is Small? Non-linearities in Heterogeneous Agent Models

Javier Bianchi and Greg Kaplan

No 815, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: In plausibly calibrated heterogeneous-agent models, marginal propensities to consume (MPCs) are highly non-linear in wealth, falling sharply away from borrowing constraints. As a result, the aggregate consumption response to a fiscal transfer is strongly concave in its size: larger transfers shift households out of high-MPC regions, dampening the consumption response. Across partial- and general-equilibrium settings, linear methods substantially overstate the effects of fiscal stimulus at empirically relevant sizes. Local methods of any order are unlikely to be reliable in settings where a failure of Ricardian equivalence from high MPCs is important.

Keywords: Heterogeneous agents; non-linearities; HANK (search for similar items in EconPapers)
JEL-codes: C63 D15 D31 D52 E21 E62 G51 (search for similar items in EconPapers)
Date: 2026-06-22
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Working Paper: How Small is Small? Non-linearities in Heterogeneous Agent Models (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:103410

DOI: 10.21034/wp.815

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