Wealth Heterogeneity and the Marginal Propensity to Consume out of Wealth

We provide detailed estimates of how the marginal propensity to consume out of wealth (MPC) varies along the distribution of household wealth and by asset composition, and analyse the sources of MPC heterogeneity across euro area countries. To do this, we i) build a household-level panel dataset combining wealth and consumption surveys for five European countries, and ii) use instrumented household-level panel regressions. First, we find heterogeneity across the wealth distribution with lower MPCs for high-wealth households. Second, we account for asset composition and show the significant role of housing wealth in all countries. We show that our results are indicative of a collateral channel. Third, cross-country differences in MPCs are mostly explained by country-specific institutional and socio-economic characteristics in Germany (compared to Spain) and by differences in consumption behaviours for Belgium, Cyprus and Italy. We show that MPC heterogeneity is related to homeownership rates, mortgage markets, demographics, and wealth inequality. Finally, we investigate to what extent heterogeneous MPC and wealth inequality affect consumption inequality.