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A structural VAR (SVAR) based approach to calculating the marginal propensity to consume (MPC) across income groups

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  • Nizam, Ahmed Mehedi

Abstract

Here we have devised a new structural VAR (SVAR) based approach to measuring marginal propensity to consume (MPC) of households from different income groups. To be precise, we build structural VAR model with group-wise income and expenditure data of US households and perform impulse response analysis on the model to estimate the MPC of different income groups. Our analysis suggests that MPC values of US households belonging to bottom [0-20]%, [20-40]%, [40-60]%, [60-80]% and [80-100]% income group are 0.95, 0.81, 0.74, 0.71 and 0.35 respectively, which nicely converges with the existing theory of MPC that says, low income households have higher MPCs. Alongside conventional approaches of measuring MPCs, which involve OLS regression, instrumental variable, randomized control trial, natural experiment, variance decomposition etc., here we have developed a new methodology of measuring MPCs, which relies on standardized secondary data and provides reliable estimates of MPCs that nicely resembles to the existing theory.

Suggested Citation

  • Nizam, Ahmed Mehedi, 2026. "A structural VAR (SVAR) based approach to calculating the marginal propensity to consume (MPC) across income groups," MPRA Paper 128019, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:128019
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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