A structural VAR (SVAR) based approach to calculating the marginal propensity to consume (MPC) across income groups

Ahmed Mehedi Nizam

MPRA Paper from University Library of Munich, Germany

Abstract: Here we have devised a new structural VAR (SVAR) based approach to measuring marginal propensity to consume (MPC) of households from different income groups. To be precise, we build structural VAR model with group-wise income and expenditure data of US households and perform impulse response analysis on the model to estimate the MPC of different income groups. Our analysis suggests that MPC values of US households belonging to bottom [0-20]%, [20-40]%, [40-60]%, [60-80]% and [80-100]% income group are 0.95, 0.81, 0.74, 0.71 and 0.35 respectively, which nicely converges with the existing theory of MPC that says, low income households have higher MPCs. Alongside conventional approaches of measuring MPCs, which involve OLS regression, instrumental variable, randomized control trial, natural experiment, variance decomposition etc., here we have developed a new methodology of measuring MPCs, which relies on standardized secondary data and provides reliable estimates of MPCs that nicely resembles to the existing theory.

Keywords: Marginal propensity to consume; structural VAR (SVAR); income group (search for similar items in EconPapers)
JEL-codes: C32 E21 (search for similar items in EconPapers)
Date: 2026-02-11
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