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Heterogeneity in MPC Beyond Liquidity Constraints: The Role of Permanent Earnings

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  • Jeanne Commault

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

The distribution of MPCs is central in many economic questions but presents puzzling stylized facts. I show that standard consumption models generate a positive relation between people's permanent component of earnings and their MPC, because the MPC depends on liquid wealth but also on the variance of future earnings. This variance is higher at higher levels of permanent earnings. This relation can explain recent stylized facts. Survey data support a positive effect of permanent earnings on the MPC, of a magnitude comparable to that of wealth. Numerical simulations with realistic earnings risk replicate the survey results and stylized facts.

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  • Jeanne Commault, 2024. "Heterogeneity in MPC Beyond Liquidity Constraints: The Role of Permanent Earnings," SciencePo Working papers Main hal-03870685, HAL.
    • Handle: RePEc:hal:spmain:hal-03870685
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03870685v2
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    1. Savoia, Ettore, 2023. "The effects of labor income risk heterogeneity on the marginal propensity to consume," Working Paper Series 2866, European Central Bank.
    2. Fatih Guvenen & Rocio Madera & Serdar Ozkan, 2024. "Consumption Dynamics and Welfare Under Non-Gaussian Earnings Risk," Working Papers 2024-007, Federal Reserve Bank of St. Louis, revised 27 Jul 2024.

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    Keywords

    Marginal Propensity to Consume; Earnings Risk; Precautionary Saving; Standard Incomplete Market Model;
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