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Latent Heterogeneity in the Marginal Propensity to Consume

Author

Listed:
  • Daniel Lewis

    (Federal Reserve Bank of New York)

  • Davide Melcangi

    (Federal Reserve Bank of New York)

  • Laura Pilossoph

    (Federal Reserve Bank of New York)

Abstract

Recent work highlights the importance of heterogeneity in marginal propensities to consume (MPCs) out of transitory income shocks for fiscal policy, the transmission of monetary policy, and welfare. In this paper, we construct an estimator for individual MPCs using the Grouped Marginal Effects Estimator (GMEE), which optimally groups households together that have similar latent MPCs. The approach we propose is agnostic about the source of heterogeneity and estimates distinct MPCs as well as which households display these distinct propensities. We apply the estimator to the 2008 tax rebate and household consumption data from the Consumer Expenditure Survey (CEX), exploiting the randomized timing of payments as previously done in the literature. Our approach uncovers a large degree of heterogeneity in household MPCs, and permits the identification of observable characteristics that predict household MPCs.

Suggested Citation

  • Daniel Lewis & Davide Melcangi & Laura Pilossoph, 2019. "Latent Heterogeneity in the Marginal Propensity to Consume," 2019 Meeting Papers 519, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:519
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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. Edmund S. Crawley & Andreas Kuchler, 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

    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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