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The Distribution of Wealth and the Marginal Propensity to Consume

Author

Listed:
  • 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)

Abstract

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).

Suggested Citation

  • Christopher Carroll & Jiri Slacalek & Kiichi Tokuoka & Matthew N. White, 2014. "The Distribution of Wealth and the Marginal Propensity to Consume," Working Papers 14-15, University of Delaware, Department of Economics.
  • Handle: RePEc:dlw:wpaper:14-15.
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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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    References listed on IDEAS

    as
    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, March.
    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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Microfoundations; Wealth Inequality; Marginal Propensity to Consume;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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