Working Paper: CEPR ID: DP17271
Authors: Greg Kaplan; Giovanni L. Violante
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 assetstructure, 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 canbe justified from the perspective of theory and data.
Keywords: borrowing constraints; consumption; hand-to-mouth; heterogeneity; income risk; liquidity; marginal propensity to consume; market incompleteness; precautionary saving; wealth distribution
JEL Codes: D15; D31; D52; E21; E62; E71; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| model features (C52) | average MPC (E19) |
| share and type of hand-to-mouth households (D16) | average MPC (E19) |
| one-asset models (C20) | average MPC (E19) |
| two-asset models (G19) | average MPC (E19) |
| gap between liquid and illiquid returns (G19) | average MPC (E19) |
| two-asset model extensions (G19) | average MPC and wealth data (E21) |