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The Marginal Propensity to Consume in Heterogeneous Agent Models
Abstract
What model features and calibration strategies yield a large average marginal propensity to consume (MPC) in heterogeneous agent models? Through a systematic investigation of models with different preferences, dimensions of ex-ante heterogeneity, income processes, and asset structures, we show that the most important factor is the share and type of hand-to-mouth households. One-asset models either feature a trade-off between a high average MPC and a realistic level of aggregate wealth or generate an excessively polarized wealth distribution that vastly understates the wealth held by households in the middle of the distribution. Two-asset models that include both liquid and illiquid assets can resolve this tension with a large enough gap between liquid and illiquid returns. We discuss how such return differential can be justified from the perspective of theory and data.
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“The estimates based on BP in column 1 are closely in line with the literature: typical estimates of the quarterly MPX for all expenditures range from 50 to 90%, while estimates of the quarterly MPX for non-durable expenditure range from 15 to 25%.”
From Revisiting Event-Study Designs: Robust and Efficient Estimation (2024) · cites this paper as Kaplan and Violante (2022)
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Metadata
- Authors
- Kaplan, G., & Violante, G. L.
- Affiliations
- National Bureau of Economic Research (US)
- University of Copenhagen (DK)
- Venue
- Annual Review of Economics
- Publisher
- Annual Reviews
- Published
- 2022-08-12
- Volume
- 14
- Issue
- 1
- Pages
- 747-775
- ISSN
- 1941-1383 (ISSN-L)
- 1941-1391
- OpenAlex
- W4290851807
- Cited by
- 116
- References
- 58
- Citations by year
- 2026: 18 · 2025: 30 · 2024: 35 · 2023: 24 · 2022: 8
- FWCI
- 4.49
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Annual Review of Economics (publishedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic theories and models
- Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Economic Theory and Policy
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Complex Systems and Time Series Analysis
- Keywords
- marginal propensity to consume, heterogeneous agent model, hand-to-mouth households, wealth distribution, model calibration, household preferences, aggregate wealth, return differentials
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