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Subjective Uncertainty and the Marginal Propensity to Consume

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Abstract

Earnings uncertainty is central to most heterogeneous-household models. Yet, there is surprisingly little evidence on how subjective uncertainty is related to consumption behavior. Using unique data from the Survey of Consumer Expectations, we show that the marginal propensity to consume (MPC) is increasing and concave in individual specific earnings growth uncertainty. In the workhorse consumption–savings model, augmented with risk heterogeneity, MPCs decline with earnings uncertainty, contrary to the empirical evidence. We pinpoint which mechanisms, central to the model, create this disconnect and show how recently proposed deviations from the full-information rational expectations framework can reconcile theory with the empirical findings.

Suggested Citation

  • Gizem Koşar & Davide Melcangi, 2025. "Subjective Uncertainty and the Marginal Propensity to Consume," Staff Reports 1148, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:99761
    DOI: 10.59576/sr.1148
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    More about this item

    Keywords

    marginal propensity to consume; consumption; subjective uncertainty; heterogeneity;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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