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Subjective Uncertainty and the Marginal Propensity to Consume

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Listed:
  • Gizem Kosar
  • Davide Melcangi

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 Kosar & Davide Melcangi, 2025. "Subjective Uncertainty and the Marginal Propensity to Consume," CESifo Working Paper Series 11792, CESifo.
  • Handle: RePEc:ces:ceswps:_11792
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    References listed on IDEAS

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    1. Oliver Pfäuti & Fabian Seyrich & Jonathan Zinman, 2024. "Bad Luck or Bad Decisions? Macroeconomic Implications of Persistent Heterogeneity in Cognitive Skills and Overconfidence," Discussion Papers of DIW Berlin 2080, DIW Berlin, German Institute for Economic Research.
    2. Johannes Boehm & Etienne Fize & Xavier Jaravel, 2025. "Five Facts about MPCs: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, vol. 115(1), pages 1-42, January.
    3. Jappelli, Tullio & Pistaferri, Luigi, 2000. "Using subjective income expectations to test for excess sensitivity of consumption to predicted income growth," European Economic Review, Elsevier, vol. 44(2), pages 337-358, February.
    4. Koşar, Gizem & Melcangi, Davide & Pilossoph, Laura & Wiczer, David, 2023. "Stimulus through Insurance: The Marginal Propensity to Repay Debt," IZA Discussion Papers 16211, Institute of Labor Economics (IZA).
    5. Oliver Pfäuti & Fabian Seyrich & Jonathan Zinman, 2024. "Beyond Bad Luck: Macroeconomic Implications of Persistent Heterogeneity In Optimism," NBER Working Papers 32305, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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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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