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Latent Heterogeneity in the Marginal Propensity to Consume

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  • Daniel J. Lewis
  • Davide Melcangi
  • Laura Pilossoph

Abstract

We estimate the distribution of marginal propensities to consume (MPCs) using a novel clustering approach that generalizes the fuzzy C-means algorithm to regression settings. We apply the estimator to the 2008 stimulus payments, exploiting the randomized timing of disbursements, and find considerable heterogeneity in MPCs that varies by consumption good. We document observable determinants of this heterogeneity, without imposing ex ante assumptions on such relationships; MPCs correlate positively with income and the average propensity to consume, but much heterogeneity remains unexplained. The partial equilibrium response to the stimulus is twice that based on homogeneous estimates, highlighting the quantitative importance of heterogeneity.

Suggested Citation

  • Daniel J. Lewis & Davide Melcangi & Laura Pilossoph, 2019. "Latent Heterogeneity in the Marginal Propensity to Consume," Staff Reports 902, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:902
    Note: Revised August 2020.
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    References listed on IDEAS

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    1. Andreas Fagereng & Martin B. Holm & Gisle J. Natvik, 2016. "MPC heterogeneity and household balance sheets," Discussion Papers 852, Statistics Norway, Research Department.
    2. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    3. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, December.
    4. , 2020. "Consumption Heterogeneity: Micro Drivers and Macro Implications," Finance and Economics Discussion Series 2020-005, Board of Governors of the Federal Reserve System (U.S.).
    5. Christopher Carroll & Jiri Slacalek & Kiichi Tokuoka & Matthew N. White, 2017. "The distribution of wealth and the marginal propensity to consume," Quantitative Economics, Econometric Society, vol. 8(3), pages 977-1020, November.
    6. Greg Kaplan & Giovanni L. Violante, 2014. "A Model of the Consumption Response to Fiscal Stimulus Payments," Econometrica, Econometric Society, vol. 82(4), pages 1199-1239, July.
    7. Kanishka Misra & Paolo Surico, 2014. "Consumption, Income Changes, and Heterogeneity: Evidence from Two Fiscal Stimulus Programs," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 84-106, October.
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    Cited by:

    1. Jorge Miranda-Pino & Daniel Murphy & Kieran Walsh & Eric R. Young, 2020. "A Model of Expenditure Shocks," Working Papers 202004, Federal Reserve Bank of Cleveland.

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    More about this item

    Keywords

    marginal propensity to consume; consumption; tax rebate; heterogeneous treatment effects; machine learning; clustering; C-means;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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