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How Small is Small? Non-linearities in Heterogeneous Agent Models

Author

Listed:
  • Javier Bianchi
  • Greg Kaplan

Abstract

In plausibly calibrated heterogeneous-agent models, marginal propensities to consume (MPCs) are highly non-linear in wealth, falling sharply away from borrowing constraints. As a result, the aggregate consumption response to a fiscal transfer is strongly concave in its size: larger transfers shift households out of high-MPC regions, dampening the consumption response. Across partial- and general-equilibrium settings, linear methods substantially overstate the effects of fiscal stimulus at empirically relevant sizes. Local methods of any order are unlikely to be reliable in settings where a failure of Ricardian equivalence from high MPCs is important.

Suggested Citation

  • Javier Bianchi & Greg Kaplan, 2026. "How Small is Small? Non-linearities in Heterogeneous Agent Models," Working Papers 815, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:103410
    DOI: 10.21034/wp.815
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    Keywords

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    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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