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The Distribution of Wealth and the Marginal Propensity to Consume

Listed author(s):
  • Christopher Carroll

    (Johns Hopkins University)

  • Jiri Slacalek

    (European Central Bank)

  • Kiichi Tokuoka

    (Japanese Ministry of Finance)

  • Matthew N. White

    ()

    (Department of Economics, University of Delaware)

We present a macroeconomic model calibrated to match both microeconomic and macroeconomic evidence on household income dynamics. When the model is modified in a way that permits it to match empirical measures of wealth inequality in the U.S., we show that its predictions (unlike those of competing models) are consistent with the substantial body of microeconomic evidence that suggests that the annual marginal propensity to consume (MPC) is much larger than the 0.02-0.04 range implied by commonly-used macroeconomic models. Our model also plausibly predicts that the aggregate MPC can differ greatly depending on how the shock is distributed across categories of households (e.g., low-wealth versus high-wealth households).

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File URL: http://www.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2014/UDWP2014-15.pdf
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Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 14-15.

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Length: 40 pages
Date of creation: 2014
Handle: RePEc:dlw:wpaper:14-15.
Contact details of provider: Postal:
Purnell Hall, Newark, Delaware 19716

Phone: (302) 831-2565
Fax: (302) 831-6968
Web page: http://lerner.udel.edu/departments/economics/department-economics/

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References listed on IDEAS
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  1. Richard Blundell & Hamish Low & Ian Preston, 2013. "Decomposing changes in income risk using consumption data," Quantitative Economics, Econometric Society, vol. 4(1), pages 1-37, 03.
  2. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March.
  3. Sumit Agarwal & Wenlan Qian, 2014. "Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore," American Economic Review, American Economic Association, vol. 104(12), pages 4205-4230, December.
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