Marginal Propensity To Consume Research Articles

Redistributive fiscal policy and marginal propensities to consume

This paper studies the output effect of transfers in a New Keynesian model with heterogeneous dynasties of overlapping generations, which allows for arbitrary heterogeneity in marginal propensities to consume (MPCs). The role of MPCs is mainly to determine the timing of the fiscal stimulus. Thus, it is not MPCs per se that determine the cumulative effect on output, but rather the interaction between the timing of the stimulus and other features of the model, such as financial frictions and an endogenous monetary policy response. Financially-constrained households always prefer a front-loaded stimulus, while the endogenous monetary policy can generate an ambiguous relation between MPCs and output. From a normative perspective, however, there is no ambiguity: with larger differences in MPCs, macro stabilization can be obtained at a smaller welfare cost.

Who are the Hand-to-Mouth?

Abstract Many households hold little wealth. In standard precautionary savings models these households should not only display higher marginal propensities to consume (MPCs), but also higher future consumption growth. In contrast, we see from the PSID that such “hand-to-mouth” households do not display higher growth in spending. They also exhibit greater volatility of spending and adjust their spending to a greater extent through the number of categories consumed. Consistent with a role for preference heterogeneity, the panel data show that it is persistent differences across households, not current assets, that predict low consumption growth and other spending differences for the hand-to-mouth households. To identify the extent of preference heterogeneity, we consider the model of KV with both liquid and illiquid assets, but allow heterogeneity in preferences. To match the data, many poor hand-to-mouth must be relatively impatient and have a high inter-temporal elasticity of substitution (IES). The model shows that preferences predominantly explain the higher MPCs for low-asset households. Preference heterogeneity notably increases the spending impact of fiscal transfers, but only if targeted, while reducing that from interest rate cuts.

The consumption expenditure response to unemployment: Evidence from Norwegian households

This paper examines heterogeneity in household income and consumption responses to unemployment, using granular administrative tax data from Norway. On average, unemployment results in a significant, lasting income reduction, accompanied by a decrease in consumption expenditures of between one-third to one-half of the income loss. We find that households with greater liquid assets at the outset experience less of a decline in consumption, whereas those with higher levels of debt encounter a more substantial decrease. Notably, also the interaction of liquid assets and debt holdings matters for the consumption response. While households with larger initial liquid asset holdings on average respond less, the analyses show that this is not the case among households that simultaneously hold substantial amounts of debt, thus adding to a more nuanced view of the importance of household heterogeneity for economic outcomes. Furthermore, our investigation into heterogeneity across family composition and child age uncovers distinct patterns in consumption responses, highlighting the varied impacts of unemployment. Lastly, we find that spending patterns, as indicated by the marginal propensity to consume (MPC), become more pronounced during recessions.

Rise in Consumerism and its Impact on Sustainable Development

Consumption is the function of disposable income. Consumption contributes a lot to the investment of any country. Consumption in a country depends on the marginal propensity to consume (MPC), Veblen effect, Snob effect, Bandwagon effect, Short sight of the consumer, etc. Keeping this in mind, producers produce those goods and services which can provide satisfaction to the consumers. Advertisement and marketing has become the lifeline of today’s market structure which psychologically attracts the consumer so much that the consumer purchases goods and services without wanting them. Due to this ecological and social problems start in the society. This is where consumerism begins. America’s great economist Professor Thorstein Veblen first spoke on the subject of consumerism which was based on conspicuous consumption. The problem of rising consumerism today is resulting in the reckless use of limited resources bestowed to us by mothernature. Since resources are limited, the excessive use of resources will lead to the exhaustion of non-renewable resources very quickly. Even it will be difficult, if not impossible, to compensate for the loss of renewable resources so fast. Today our greed and irresponsible behavior is the basic reason for all environmental issues and problems be it global warming, deforestation, pollution, or the issue of sustainability. This paper will highlight in detail how rising consumerism has led to many environmental issues and how simple living and high thinking can be the answer to sustainability.

Mistakes in Future Consumption, High MPCs Now

In a canonical intertemporal consumption model, future consumption mistakes (in response to saving changes) lead to higher current marginal propensities to consume (MPCs). These mistakes increase the value of changing current consumption relative to changing saving, as additional saving will not be spent optimally. Various behavioral biases can cause these mistakes, such as inattention, present bias, diagnostic expectations, and near-rationality (epsilon-mistakes). This result helps explain the empirical puzzle of high-liquidity consumers’ high MPCs. In my approach, predictions of sophistication (anticipation of future mistakes) can be derived independently of the underlying biases. (JEL D15, D91, E21)

Financial concerns and the marginal propensity to consume in COVID times: Evidence from UK survey data

We study how household concerns about their future financial situation may affect the marginal propensity to consume (MPC) during the COVID-19 pandemic. We use a representative survey of UK households to compute the MPC from a hypothetical transfer of £500. We find that household expectations play a key role in determining differences in MPCs across households: households that are concerned about not being able to make ends meet have a 20% higher MPC than other households. Our findings suggest that policies targeted at vulnerable and financially distressed households may prove more effective in stimulating demand than providing stimulus payments to all households.

Marginal propensity to consume and unemployment: A meta-analysis

This paper considers 1244 estimates of marginal propensities to consume (MPC) out of stimulus checks and other small transitory or predictable payments. The mean quarterly MPC estimate reported by the literature is .35, but estimates vary widely. I use meta-regressions to study sources of this variation. MPC estimates increase with the unemployment rate: at 4% unemployment MPC out of a $1200 stimulus check is about .22, while for unemployment of 8% it is around .4. MPC estimates decrease with the size of the payments. MPCs are lower for households holding ample liquidity. MPCs out of stimulus checks are higher than those out of some recurring payments. These results highlight the importance of considering state-dependent multipliers, liquidity constraints, two-asset models, near rationality, and mental accounting.

Economic Productivity through Net National Disposable Income

According to the Keynesian consumption function, Consumption expenditure plays a crucial role in determining the Gross Domestic Product (GDP), as evident in the Absolute Income Hypothesis. This concept has subsequently been used in developing the permanent income hypothesis and the life cycle hypothesis. However, when considering the net national disposable income after accounting for factors like net factor income from abroad, taxes, and subsidies, it becomes clear that final consumption expenditure holds a more dominant position. A gap in the existing literature arises from the historical unavailability of data, leading to the use of GDP as a proxy variable instead of net national disposable income when determining the consumption function for India. This research paper aims to address this gap by employing the net national disposable income of the Indian economy to estimate the consumption function for the period between 1994 and 2018. Additionally, it empirically tests the long-term effects of current income and current wealth (defined as past year income minus past year consumption) on consumption within the context of the Indian economy. The empirical findings provide support for a significant positive relationship between consumption and income and wealth. This is further substantiated by the significant values of the marginal propensity to consume (MPC) derived from income and wealth during the given time period. The estimated equation aligns with the life cycle hypothesis for the Indian economy, indicating that long-term, steadfast planning is crucial for improving the productive capacity of the economy, reducing poverty, and enhancing employment levels more effectively.

An Econometric Analysis of Consumption Behavior of Nepalese People

Background: Consumption is a crucial variable, influenced by level of income. The relationship between income and consumption referred as MPC. Objectives: The main objective of the study is to find the relationship between current income and current consumption at the national and local levels. Methods: During data analysis, we collected cross-sectional data (current income and expenditure) using a questionnaire from the study area. However, the time series data were obtained from a secondary source, and the econometric model was built on the absolute income hypothesis (AIH). Results: MPCs have four different values. One is for the national level, and three are for the local level. The MPCs from cross-sectional data were derived according to the high, middle, and small income levels. The national MPC is 0.0000117 and local-level MPCs are 0.55, 0.46, and 0.92. The MPC of the middle-income group and national levels were not significant however the other two are significant. Implications: The present study shows that the consumption and income relationship is stronger for high-income and low-income groups than for the middle-income and national level. However, the study was limited to rural individuals with agriculture as their primary occupation, and other factors such as debt, savings, and population size were not considered. The facts do not support the national level econometric consumption function. Therefore, we concluded that income is not the determining factor of consumption in the Nepalese perspective. Conclusions: The income level is an important factor in determining the consumption level of people. This study was carried out based on the time series and cross-sectional data. There are four marginal propensities to consume (MPC), i.e. one for the national level and three for the local level.

MPCs, MPEs, and Multipliers: A Trilemma for New Keynesian Models

Abstract We show that New Keynesian models with frictionless labor supply face a challenge: given standard parameters, they cannot simultaneously match plausible estimates of marginal propensities to consume (MPCs), marginal propensities to earn (MPEs), and fiscal multipliers. A HANK model with sticky wages provides a solution to this trilemma.

The Trickling Up of Excess Savings

We provide a simple framework connecting the distribution of excess savings across households to the dynamics of aggregate demand. Deficit-financed fiscal transfers generate excess savings. The poorest households with the highest marginal propensities to consume (MPCs) spend down their excess savings the fastest, increasing other households' incomes and their excess savings. This leads to a long-lasting increase in aggregate demand until, ultimately, excess savings have “trickled up” to the richest savers with the lowest MPCs, raising wealth inequality.

The Matching Multiplier and the Amplification of Recessions

This paper shows that the unequal incidence of recessions in the labor market amplifies aggregate shocks. Using administrative data from the United States, I document a positive covariance between workers' marginal propensities to consume (MPCs) and their elasticities of earnings to GDP, which is a key moment for a new class of heterogeneous-agent models. I define the matching multiplier as the increase in the multiplier stemming from this matching of high MPC workers to more cyclical jobs. I show that this covariance is large enough to increase the aggregate MPC by 20 percent over an equal exposure benchmark. (JEL E21, E23, E24, E32)

The Response of Consumer Spending to Changes in Gasoline Prices

This paper estimates how overall consumer spending responds to changes in gasoline prices. It uses the differential impact across consumers of the sharp drop in gasoline prices in 2014 for identification. This estimation strategy is implemented using comprehensive, high-frequency, transaction-level data for a large panel of individuals. The average estimated marginal propensity to consume (MPC) out of unanticipated, permanent shocks to income is approximately one. This estimate accounts for the elasticity of demand for gasoline and potential slow adjustment to changes in prices. The high MPC implies that changes in gasoline prices have large aggregate effects. (JEL D12, G51, L11, L71, L81, Q35)

The redistributive effects of monetary policy in an overlapping generations model

I study the redistributive effects of monetary policy with attention to a wealth effect for savers generated by a cut in interest rates. To this end, I build a full-fledged overlapping generations New Keynesian model (OLGNK) that features marginal propensity to consume (MPC) heterogeneity, financial frictions, and precautionary saving behavior. The model is calibrated to match the U.S. demographic structure and yields empirically realistic MPCs and inequality among households. I find that a negative wealth effect resulting from an interest rate cut for savers is substantial, which dampens the impulse responses of aggregate output relative to those in a representative agent New Keynesian (RANK) model. This finding is in contrast to a heterogeneous agent New Keynesian (HANK) model, in which there is amplification of monetary policy relative to RANK.

Consumption Heterogeneity: Micro Drivers and Macro Implications

We document heterogeneity in the marginal propensity to consume (MPC) across household characteristics relevant to understanding heterogeneous agent models and monetary policy transmission. We find a strong negative relationship between household liquid wealth and MPC. We show that household liquid wealth predicts MPC closely for every other household characteristic we look at. We use a new empirical method that overcomes sources of bias found in the existing literature, along with administrative data from Denmark that allow us to identify heterogeneous behavior. We use our results to analyze monetary policy transmission mechanisms in both Denmark and the United States. (JEL D12, D31, E21, E43, E52, G51)

MPCs in an emerging economy: Evidence from Peru

This paper estimates the marginal propensity to consume (MPC) out of transitory income shocks for an emerging economy, Peru, using its nationally representative household survey. The mean quarterly MPC across Peruvian income deciles is 0.204, which translates to a mean annualized MPC of 0.545–0.592 under both model-free and model-based annualization methods. To compare Peruvian and U.S. MPCs reflecting the different reference periods of the underlying surveys, I employ a standard incomplete-market model. Two striking differences emerge. First, the mean annual MPC in Peru is three times as large as that in the U.S. Second, the MPCs are substantially more heterogeneous over income deciles in Peru than in the U.S. The model predicts that precautionary saving behavior drives both the higher mean MPC and stronger MPC heterogeneity in Peru.

Zakat Effect on Aggregate Consumption in Islamic Economy in Cirebon

Zakat is a tax collected from Muslim rich people to help the poor Muslim community . Results of research conducted at BAZNAS Cirebon shows that the effect of zakat can have an effect on aggregate consumption. The MPC (Marginal Propensity to Consume) value obtained for muzakki is 0.46 and mustahik is 0.76. It shows that the mustahik MPC is greater than the muzakki MPC, meaning that there is an increase in aggregate consumption due to the large change in mustahik's income. Wealthy groups who pay zakat are more stable than other rich groups who do not pay zakat, this can be seen when the income of muzakki and other rich groups is the same, the MPC values are different , namely MPCZ = 0.4 and MPCK = 0.7 . The value of MPCZ muzakki (zakat) is closer to zero than MPCK muzakki (non-zakat) which is close to one, meaning that the consumption of muzakki (zakat) is more stable. This shows that the increase in aggregate consumption in the Islamic economy is better than the conventional economy.

Fiscal multipliers, monetary efficacy, and hand-to-mouth households

The effectiveness of fiscal and monetary policy has been found to exhibit large heterogeneity across countries, and it hinges heavily on households’ marginal propensity to consume (MPC) in response to the policy shocks. This paper examines the role of households’ liquidity, saving, and credit constraints as microfactors that underpin households’ MPC and hence affect the macro level fiscal and monetary policy effectiveness.This paper presents a uniform framework to measure the degree of various constraints faced by consumers, and employs data from 20 European countries to examine their nexus with hand-to-mouth (HtM) households. Our findings demonstrate that (i) a higher ratio of HtM households generally enhances fiscal multipliers; in particular, the size of tax multipliers is enhanced by the wealthy-HtM ratio (HtM households that hold positive illiquid wealth), whereas the size of fiscal spending multipliers is enhanced by the poor-HtM ratio (households that hold no illiquid wealth); (ii) monetary efficacy is higher in countries with larger HtM ratios, especially those with higher wealthy-HtM ratios; (iii) sole liquidity-constrained HtM households (type-I HtM households) enhance the efficacy of fiscal and monetary policies, but triple constrained HtM households (type-II HtM households that are liquidity-, saving-, and credit-constrained) do not enhance the efficacy, or even do the opposite. The triple constrained case is true especially for the monetary efficacy due to the dampening effect of the credit constraint. This paper contributes to the literature by providing evidence for the heterogeneous impacts of liquidity vs. saving and credit constrained HtM households, and wealthy- vs. poor-HtM households on fiscal and monetary efficacy.

The Marginal Propensity to Consume in Heterogeneous Agent Models

What model features and calibration strategies yield a large average marginal propensity to consume (MPC) in heterogeneous agent models? Through a systematic investigation of models with different preferences, dimensions of ex-ante heterogeneity, income processes, and asset structures, we show that the most important factor is the share and type of hand-to-mouth households. One-asset models either feature a trade-off between a high average MPC and a realistic level of aggregate wealth or generate an excessively polarized wealth distribution that vastly understates the wealth held by households in the middle of the distribution. Two-asset models that include both liquid and illiquid assets can resolve this tension with a large enough gap between liquid and illiquid returns. We discuss how such return differential can be justified from the perspective of theory and data.

The heterogeneity of interest-induced MPC: Evidence from mortgage borrowers

Using comprehensive credit bureau data of South Korea, this paper explores the heterogeneous interest-induced Marginal Propensity to Consume (MPC) for mortgage borrowers by their liquidity, credit accessibility, and debt burden. The main findings are as follows. First, the negative relationship between interest payments and consumption comes from borrowers with Adjustable-Rate Mortgages (ARMs). Second, among mortgagors with ARMs, those with low liquidity and credit accessibility show a high interest-induced MPC. Third, the mortgagors with high debt burdens show relatively low interest-induced MPC due to active deleveraging behavior. Fourth, while unconstrained borrowers consistently show low and insignificant MPC, constrained borrowers (those with low liquidity, credit accessibility) maintain long-lasting high MPCs for eight quarters after interest reduction. These results imply that the magnitude and persistence of consumption effect of interest payment reduction depend largely on financial characteristics of mortgage borrowers.