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What drives heterogeneity in the marginal propensity to consume? Temporary shocks vs persistent characteristics

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  • Gelman, Michael

Abstract

Many empirical studies show that cash on hand is the most important source of variation in explaining heterogeneity in the marginal propensity to consume (MPC). To explain this, one class of models focuses on the role of heterogeneity in persistent characteristics across individuals while the other class focuses on the role of circumstances within individuals. This paper provides the first empirical measure of the relative importance of circumstances and characteristics in explaining the variance of the MPC. It then maps this empirical measure into a buffer stock model with discount factor heterogeneity to assess how well it explains the data.

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  • Gelman, Michael, 2021. "What drives heterogeneity in the marginal propensity to consume? Temporary shocks vs persistent characteristics," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 521-542.
    • Handle: RePEc:eee:moneco:v:117:y:2021:i:c:p:521-542
    DOI: 10.1016/j.jmoneco.2020.03.006
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    Cited by:

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    2. Michael Boutros, 2022. "Windfall Income Shocks with Finite Planning Horizons," Staff Working Papers 22-40, Bank of Canada.
    3. Giovanni L. Violante & Greg Kaplan, 2022. "The Marginal Propensity to Consume in Heterogeneous Agent Models," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 747-775, August.
    4. Misuraca, Roberta & Zimmermann, Klaus, 2024. "Migration and Consumption," MERIT Working Papers 2024-006, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    5. Edmund Crawley & Andreas Kuchler, 2020. "Consumption Heterogeneity: Micro Drivers and Macro Implications," Finance and Economics Discussion Series 2020-005, Board of Governors of the Federal Reserve System (U.S.).
    6. Uras, Burak R. & van Buggenum, Hugo, 2022. "Preference heterogeneity and optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    7. Puneet Vatsa & Junpeng Li & Phong Quoc Luu & Julio Cesar Botero‐R, 2023. "Internet use and consumption diversity: Evidence from rural China," Review of Development Economics, Wiley Blackwell, vol. 27(3), pages 1287-1308, August.
    8. van Buggenum, Hugo, 2021. "Coexistence of Money and Interest-Bearing Bonds," Other publications TiSEM 0bd7c6fc-3779-4bf3-9100-0, Tilburg University, School of Economics and Management.
    9. Kozo UEDA, 2023. "Marginal Propensity to Consume and Personal Characteristics: Evidence from Bank Transaction Data and Survey," CIGS Working Paper Series 23-007E, The Canon Institute for Global Studies.
    10. Yunho Cho & James Morley & Aarti Singh, 2024. "Did marginal propensities to consume change with the housing boom and bust?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(1), pages 174-199, January.
    11. Kozo UEDA, 2023. "Marginal Propensity to Consume to Two-Time Income Shocks," CIGS Working Paper Series 23-008E, The Canon Institute for Global Studies.
    12. Michael Boutros & Andrej Mijakovic, 2024. "The Macroeconomic Implications of Coholding," Staff Working Papers 24-16, Bank of Canada.
    13. Michiru Kaneda & So Kubota & Satoshi Tanaka, 2021. "Who spent their COVID-19 stimulus payment? Evidence from personal finance software in Japan," The Japanese Economic Review, Springer, vol. 72(3), pages 409-437, July.
    14. Kris Boudt & Koen Schoors & Milan van den Heuvel & Johannes Weytjens, 2023. "Taming the Zoo of Consumption Responses to Labour Income Changes," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 23/1067, Ghent University, Faculty of Economics and Business Administration.
    15. Pirmin Fessler & Severin Rapp, 2023. "The subjective wealth distribution: How it arises and why it matters to inform policy? (Pirmin Fessler, Severin Rapp)," Working Papers 249, Oesterreichische Nationalbank (Austrian Central Bank).
    16. Kozo UEDA & Fei Gao, 2024. "How Do Gamblers React to Wins? Evidence from Bank Transaction Data in Japan," CIGS Working Paper Series 24-019E, The Canon Institute for Global Studies.
    17. Wacks, Johannes, 2021. "Labor Market Polarization with Hand-to-Mouth Households," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242391, Verein für Socialpolitik / German Economic Association.
    18. David Finck & Peter Tillmann, 2022. "Pandemic Shocks and Household Spending," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(2), pages 273-299, April.

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    More about this item

    Keywords

    Marginal propensity to consume; Consumption; MPC heterogeneity;
    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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