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The role of MPC heterogeneity for fiscal policy in the euro area

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  • Albacete, Nicolas
  • Fessler, Pirmin
  • Pekanov, Atanas

Abstract

We assess the implications of heterogeneity in the marginal propensity to consume (MPC) for fiscal policy in the euro area. Extending the seminal work of Jappelli and Pistaferri (2014), we document an average MPC of 0.46, with significant variation across countries, household characteristics, and financial positions, including cash-on-hand as well as liquid and illiquid wealth. The mean MPC ranges from 0.33 in the Netherlands to 0.57 in Lithuania. Households with lower cash-on-hand exhibit higher MPCs on average. Policy experiments demonstrate that accounting for MPC heterogeneity enhances the effectiveness of fiscal policy in stimulating GDP growth compared with assuming uniform MPCs. We provide a pandemic-related example: a fiscal stimulus programme targeted at a contact-intensive sector with higher MPCs on average, which increases aggregate consumption by 1.70%, while the same programme targeted at a less contact-intensive sector increases consumption by only 1.17%. Finally, we provide moments to support the calibration of Heterogeneous Agent New Keynesian models such as the ratio of household assets-to-GDP in the euro area, which stands at 689%.

Suggested Citation

  • Albacete, Nicolas & Fessler, Pirmin & Pekanov, Atanas, 2025. "The role of MPC heterogeneity for fiscal policy in the euro area," Journal of Macroeconomics, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:jmacro:v:86:y:2025:i:c:s0164070425000552
    DOI: 10.1016/j.jmacro.2025.103719
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    Keywords

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    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
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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