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MPC heterogeneity and household balance sheets

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  • Andreas Fagereng
  • Martin B. Holm
  • Gisle J. Natvik

Abstract

We use sizeable lottery prizes in Norwegian administrative panel data to characterize households' marginal propensities to consume (MPCs). Our main contribution is to document how MPCs vary with household characteristics and prize size, and how lottery prizes are spent and saved over time. We find that spending spikes in the year of winning, and reverts to normal within 5 years. Controlling for all items on households' balance sheets and characteristics such as education and income, it is the amount won, age and liquid assets that vary systematically with MPCs. Low-liquidity winners of the smallest prizes (around USD 1,500) are estimated to spend all within the year of winning. The same estimate for high-liquidity winners of large prizes (USD 8,300 - 150,000) is slightly below one half. While the consumption responses we find are high, their systematic relations with observables point toward well-understood mechanisms from existing theory and should be useful to quantify structural models.

Suggested Citation

  • Andreas Fagereng & Martin B. Holm & Gisle J. Natvik, 2018. "MPC heterogeneity and household balance sheets," Working Papers 4, Department of the Treasury, Ministry of the Economy and of Finance.
  • Handle: RePEc:itt:wpaper:wp2018-4
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    Cited by:

    1. Ampudia, Miguel & Georgarakos, Dimitris & Slacalek, Jiri & Tristani, Oreste & Vermeulen, Philip & Violante, Giovanni L., 2018. "Monetary policy and household inequality," Working Paper Series 2170, European Central Bank.
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    3. Christopher D. Carroll & Johns Hopkins University, 2006. "Sticky Expectations and Consumption Dynamics," Computing in Economics and Finance 2006 21, Society for Computational Economics.
    4. Cui, Wei & Sterk, Vincent, 2018. "Quantitative easing," LSE Research Online Documents on Economics 90874, London School of Economics and Political Science, LSE Library.
    5. Rozsypal, Filip & Schlafmann, Kathrin, 2017. "Overpersistence Bias in Individual Income Expectations and its Aggregate Implications," CEPR Discussion Papers 12028, C.E.P.R. Discussion Papers.
    6. Di Maggio, Marco & Kermani, Amir & Majlesi, Kaveh, 2018. "Stock Market Returns and Consumption," Working Paper Series 1198, Research Institute of Industrial Economics.
    7. Cloyne, James & Ferreira, Clodomiro & Surico, Paolo, 2015. "Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism," CEPR Discussion Papers 11023, C.E.P.R. Discussion Papers.
    8. SeHyoun Ahn & Greg Kaplan & Benjamin Moll & Thomas Winberry & Christian Wolf, 2018. "When Inequality Matters for Macro and Macro Matters for Inequality," NBER Macroeconomics Annual, University of Chicago Press, vol. 32(1), pages 1-75.
    9. Anders Rygh Swensen & Pål Boug & Ådne Cappelen & Eilev S. Jansen, 2019. "The consumption Euler equation or the Keynesian consumption function?," Discussion Papers 904, Statistics Norway, Research Department.
    10. Massenot, Baptiste, 2019. "Pain of paying in a business cycle model," SAFE Working Paper Series 194, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    11. Cui, Wei & Sterk, Vincent, 2018. "Quantitative Easing," CEPR Discussion Papers 13322, C.E.P.R. Discussion Papers.
    12. Matthew Rognlie & Adrien Auclert, 2016. "Inequality and Aggregate Demand," 2016 Meeting Papers 1353, Society for Economic Dynamics.
    13. Yves Achdou & Jiequn Han & Jean-Michel Lasry & Pierre-Louis Lions & Benjamin Moll, 2017. "Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach," NBER Working Papers 23732, National Bureau of Economic Research, Inc.
    14. Vincent Sterk & Wei Cui, 2019. "Quantitative Easing," 2019 Meeting Papers 29, Society for Economic Dynamics.
    15. Cho, Yunho & Morley, James & Singh, Aarti, 2019. "Household Balance Sheets and Consumption Responses to Income Shocks," Working Papers 2019-11, University of Sydney, School of Economics.
    16. Wei Cui & Vincent Sterk, 2018. "Quantitative Easing," Discussion Papers 1830, Centre for Macroeconomics (CFM).
    17. Luisa Corrado & Edgar Silgado-Gómez & Donghoon Yoo & Robert Waldmann, 2018. "Ambiguous economic news and heterogeneity: What explains asymmetric consumption responses?," CEIS Research Paper 443, Tor Vergata University, CEIS, revised 19 Sep 2019.
    18. Yunho Cho & Aarti Singh & James Morley, 2019. "Household Balance Sheets and Consumption Responses to Income Shocks," 2019 Meeting Papers 788, Society for Economic Dynamics.
    19. Fuster, Andreas & Kaplan, Greg & Zafar, Basit, 2018. "What would you do with $500? Spending responses to gains, losses, news, and loans," Staff Reports 843, Federal Reserve Bank of New York.

    More about this item

    Keywords

    marginal propensity to consume; household heterogeneity; income shocks;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • 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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