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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.

Suggested Citation

  • 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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    References listed on IDEAS

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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

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