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Fiscal policy and MPC heterogeneity

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  • Jappelli, Tullio
  • Pistaferri, Luigi

Abstract

We use responses to survey questions in the 2010 Italian Survey of Household Income and Wealth that ask consumers how much of an unexpected transitory income change they would consume. We find that the marginal propensity to consume (MPC) is 48 percent on average, and that there is substantial heterogeneity in the distribution. We find that households with low cash-on-hand exhibit a much higher MPC than affluent households, which is in agreement with models with precautionary savings where income risk plays an important role. The results have important implications for the evaluation of fiscal policy, and for predicting household responses to tax reforms and redistributive policies. In particular, we find that a debt-financed increase in transfers of 1 percent of national disposable income targeted to the bottom decile of the cash-on-hand distribution would increase aggregate consumption by 0.82 percent. Furthermore, we find that redistributing 1% of national disposable income from the top to the bottom decile of the income distribution would boost aggregate consumption by 0.33%. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2013/14.

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Date of creation: 2013
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Handle: RePEc:zbw:cfswop:201314

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Keywords: Marginal Propensity to Consume; Fiscal Policy; Consumption Heterogeneity;

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  1. Annamaria Lusardi & Olivia S. Mitchell, 2011. "Financial Literacy Around the World: An Overview," CeRP Working Papers 106, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  2. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 947-958, September.
  3. Claudia R. Sahm & Matthew D. Shapiro & Joel Slemrod, 2009. "Household response to the 2008 tax rebates: survey evidence and aggregate implications," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2009-45, Board of Governors of the Federal Reserve System (U.S.).
  4. Matthew D. Shapiro & Joel Slemrod, 1993. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," NBER Working Papers 4344, National Bureau of Economic Research, Inc.
  5. David S. Johnson & Jonathan A. Parker & Nicholas S. Souleles, 2004. "Household Expenditure and the Income Tax Rebates of 2001," NBER Working Papers 10784, National Bureau of Economic Research, Inc.
  6. Tullio Jappelli & Luigi Pistaferri, 2000. "Intertemporal Choice and Consumption Mobility," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0118, Econometric Society.
  7. Atif R. Mian & Amir Sufi, 2010. "Household Leverage and the Recession of 2007 to 2009," NBER Working Papers 15896, National Bureau of Economic Research, Inc.
  8. Cagetti, Marco, 2003. "Wealth Accumulation over the Life Cycle and Precautionary Savings," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 21(3), pages 339-53, July.
  9. Souleles, Nicholas S., 2002. "Consumer response to the Reagan tax cuts," Journal of Public Economics, Elsevier, Elsevier, vol. 85(1), pages 99-120, July.
  10. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers, Federal Reserve Bank of Minneapolis 502, Federal Reserve Bank of Minneapolis.
  11. Atif Mian & Amir Sufi, 2010. "Household Leverage and the Recession of 2007–09," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 58(1), pages 74-117, August.
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Cited by:
  1. Artheya, Kartik & Owens, Andrew & Schwartzman, Felipe, 2014. "Does Redistribution Increase Output? The Centrality of Labor Supply," Working Paper, Federal Reserve Bank of Richmond 14-4, Federal Reserve Bank of Richmond.

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