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

Javier Bianchi and Greg Kaplan

No 35311, NBER Working Papers from National Bureau of Economic Research, Inc

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 and thereby dampen the consumption response. Across partial- and general-equilibrium settings, linear methods substantially overstate the effects of fiscal stimulus at empirically relevant sizes. Local methods are not reliable for studying shocks and policies where a failure of Ricardian equivalence is important.

JEL-codes: C63 D15 D31 D52 E21 E62 G51 (search for similar items in EconPapers)
Date: 2026-06
Note: EFG IFM ME
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