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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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    Cited by:

    1. Hellwig, Christian & Werquin, Nicolas, 2022. "Using Consumption Data to Derive Optimal Income and Capital Tax Rates," TSE Working Papers 22-1284, Toulouse School of Economics (TSE), revised Jan 2026.
    2. Giovanni L. Violante & Greg Kaplan, 2022. "The Marginal Propensity to Consume in Heterogeneous Agent Models," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 747-775, August.
    3. Marcel Fafchamps & Aditya Shrinivas, 2022. "Risk Pooling and Precautionary Saving in Village Economies," NBER Working Papers 30128, National Bureau of Economic Research, Inc.
    4. Andre, Peter & Flynn, Joel P. & Nikolakoudis, George & Sastry, Karthik A., 2024. "Quick-fixing: Near-rationality in consumption and savings behavior," SAFE Working Paper Series 434, Leibniz Institute for Financial Research SAFE.
    5. Pierre-Olivier Gourinchas & Ṣebnem Kalemli-Özcan & Veronika Penciakova & Nick Sander, 2021. "Fiscal Policy in the Age of COVID: Does it ‘Get in all of the Cracks?’," NBER Working Papers 29293, National Bureau of Economic Research, Inc.
    6. Czellar, Veronika & Garcia, René & Le Grand, François, 2025. "Uncovering asset market participation from household consumption and income," Journal of Econometrics, Elsevier, vol. 248(C).
    7. Bilbiie, F. O. & Galaasen, S. M. & Gurkaynak, R. S. & Maehlum, M. & Molnar, K, 2025. "Hanksson," Janeway Institute Working Papers 2507, Faculty of Economics, University of Cambridge.
    8. Fessler, Pirmin & Rapp, Severin, 2024. "The Subjective Wealth Distribution: How it Arises and Why it Matters to Inform Policy?," SocArXiv 3x4jh, Center for Open Science.
    9. Jeon, Woongchan & Walsh, Kieran James, 2025. "Heterogeneity and macroeconomic state dependence in the spending response to stimulus," Economics Letters, Elsevier, vol. 247(C).
    10. Miranda-Pinto, Jorge & Murphy, Daniel & Walsh, Kieran James & Young, Eric R., 2025. "A model of expenditure shocks," Journal of Monetary Economics, Elsevier, vol. 154(C).
    11. Dutt, Satyajit & Radermacher, Jan W., 2023. "Age, wealth, and the MPC in Europe: A supervised machine learning approach," SAFE Working Paper Series 383, Leibniz Institute for Financial Research SAFE.
    12. repec:osf:socarx:3x4jh_v1 is not listed on IDEAS
    13. Thomas F. Crossley & Peter Levell & Sofía Sierra Vásquez, 2025. "What would you do with £500? (...in your own words)," IFS Working Papers W25/42, Institute for Fiscal Studies.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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