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Reported MPC in the presence of debt

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  • Sala, Hector
  • Trivín, Pedro

Abstract

We use information from the last wave of the Spanish Survey of Household Finances to study the influence of debt on self-reported marginal propensity to consume (MPC). We find an average MPC of 43% with indebted households having a smaller MPC than non-indebted households. This negative association increases along with the amount of debt. The MPC is lower for households that were subject to liquidity constraints in the previous year, and for those whose reference person is self-employed. The past relationship between income and consumption is also an important determinant of the MPC, as households that invest last year’s savings, or hold them for the future, have a lower MPC. These findings are in line with the predictions of precautionary saving models.

Suggested Citation

  • Sala, Hector & Trivín, Pedro, 2021. "Reported MPC in the presence of debt," Economics Letters, Elsevier, vol. 205(C).
    • Handle: RePEc:eee:ecolet:v:205:y:2021:i:c:s0165176521002068
    DOI: 10.1016/j.econlet.2021.109929
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    1. Tullio Jappelli & Luigi Pistaferri, 2020. "Reported MPC and Unobserved Heterogeneity," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 275-297, November.
    2. Claudia R. Sahm & Matthew D. Shapiro & Joel Slemrod, 2010. "Household Response to the 2008 Tax Rebate: Survey Evidence and Aggregate Implications," NBER Chapters, in: Tax Policy and the Economy, Volume 24, pages 69-110, National Bureau of Economic Research, Inc.
    3. Tullio Jappelli & Luigi Pistaferri, 2014. "Fiscal Policy and MPC Heterogeneity," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 107-136, October.
    4. Bunn, Philip & Le Roux, Jeanne & Reinold, Kate & Surico, Paolo, 2018. "The consumption response to positive and negative income shocks," Journal of Monetary Economics, Elsevier, vol. 96(C), pages 1-15.
    5. Andreas Fuster & Greg Kaplan & Basit Zafar, 2021. "What Would You Do with $500? Spending Responses to Gains, Losses, News, and Loans [The Spending and Debt Response to Minimum Wage Hikes]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(4), pages 1760-1795.
    6. Dimitris Christelis & Dimitris Georgarakos & Tullio Jappelli & Luigi Pistaferri & Maarten van Rooij, 2019. "Asymmetric Consumption Effects of Transitory Income Shocks," The Economic Journal, Royal Economic Society, vol. 129(622), pages 2322-2341.
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    Cited by:

    1. Savoia, Ettore, 2023. "The effects of labor income risk heterogeneity on the marginal propensity to consume," Working Paper Series 2866, European Central Bank.
    2. Sala, Hector & Trivín, Pedro, 2022. "Family Finances and Debt Overhang: Evolving Consumption Patterns of Spanish Households," IZA Discussion Papers 15222, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Marginal propensity to consume; Debt; Survey;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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