The distribution of wealth and the marginal propensity to consume

In a model calibrated to match micro- and macroeconomic evidence on household income dynamics, we show that a modest degree of heterogeneity in household preferences or beliefs is sufficient to match empirical measures of wealth inequality in the United States. The heterogeneity-augmented model'...

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Bibliographic Details
Published inQuantitative economics Vol. 8; no. 3; pp. 977 - 1020
Main Authors Carroll, Christopher, Slacalek, Jirka, Tokuoka, Kiichi, White, Matthew N
Format Journal Article
LanguageEnglish
Published New Haven, CT The Econometric Society 01.11.2017
Blackwell Publishing Ltd
John Wiley & Sons, Inc
Subjects
Consumers
D12
D31
D91
Distribution (Economics)
E21
Econometrics
Economic inequality
Economic models
Employment status
Heterogeneity
Households
inequality
Macroeconomics
marginal propensity to consume
Personal income
Propensity to consume
Wealth
Wealth distribution
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Summary:In a model calibrated to match micro- and macroeconomic evidence on household income dynamics, we show that a modest degree of heterogeneity in household preferences or beliefs is sufficient to match empirical measures of wealth inequality in the United States. The heterogeneity-augmented model's predictions are consistent with microeconomic evidence that suggests that the annual marginal propensity to consume (MPC) is much larger than the roughly 0.04 im- plied by commonly used macroeconomic models (even ones including some heterogeneity). The high MPC arises because many consumers hold little wealth despite having a strong precautionary motive. Our model also plausibly predicts that the aggregate MPC can differ greatly depending on how the shock is distributed across households (depending, e.g., on their wealth, or employment status).
ISSN:1759-7331
1759-7323
1759-7331
DOI:10.3982/QE694