Evidence and Theory on MPC Heterogeneity
Paper Session
Friday, Jan. 6, 2023 8:00 AM - 10:00 AM (CST)
- Chair: Bulent Guler, Indiana University
Who Are the Hand-to-Mouth?
Abstract
Many households hold little wealth. In standard precautionary savings models these households should not only display higher marginal propensities to consume (MPCs), but also higher future consumption growth. In fact, we see from the PSID that such “hand-to-mouth” households do not display higher growth in spending. These households do display much higher average propensities to consume (APCs) than anticipated by the standard savings model. They also exhibit greater volatility of spending and adjust their spending to a greater extent through the number of categories consumed. Consistent with a role for preference heterogeneity, the panel data show that it is the propensity to be hand-to-mouth, not current assets, that predicts low consumption growth, high APC, and other spending differences for the hand-to-mouth. To identify the extent of preference heterogeneity, we consider the model of Kaplan and Violante (2014) with both liquid and illiquid assets, but allow heterogeneity in preferences. To match the data, many poor hand-to-mouth must be relatively impatient and have a fairly high inter-temporal elasticity of substitution (IES). The model shows that preferences play a dominant role in differences in MPCs across consumers and, in particular, mostly explain the higher MPCs for low-asset households.Wealth, Race, and Consumption Smoothing of Typical Income Shocks
Abstract
We study the consumption response to typical labor income shocks and investigate how these vary by wealthand race. First, we estimate the elasticity of consumption with respect to income using an instrument based on firm-wide changes in monthly pay. While much of the consumption-smoothing literature uses variation in unusual windfall income, this instrument captures the temporary income variation that households typically experience. In addition, because it can be constructed for every worker in every month, it allows for more precision than most previous estimates. We implement this approach in administrative bank account data and find an average elasticity of 0.23, with a standard error of 0.01. This increased precision also allows us to address an open question about the extent of heterogeneity by wealth in the elasticity. We find a much lower consumption response for high-liquidity households, which may help discipline structural consumption models.
We use this instrument to study how wealth shapes racial inequality. An extensive body of work documents substantial racial and ethnic wealth gap. However, less is known about how this gap translates
into differences in welfare on a month-to-month basis. We combine our instrument for typical income volatility with a new dataset linking bank account data with race and Hispanicity. We find that black
(Hispanic) households cut their consumption 50 (20) percent more than white households when faced with
a similarly-sized income shock. Nearly all of this differential pass-through of income to consumption is
explained in a statistical sense by differences in liquid wealth. Combining our empirical estimates with
model, we show that temporary income volatility has a substantial welfare cost for all groups. Because of
racial disparities in consumption smoothing, the cost is at least 50 percent higher for black households and 20 percent higher for Hispanic households than it is for white households.
The Composition and Distribution of Wealth and Aggregate Consumption Dynamics
Abstract
We study how the composition and distribution of household wealth affects the average marginal propensity to consume (MPC) and the distribution of MPC’s. We document several facts in the Survey of Consumer Finances about the composition of household portfolios between housing, mortgage debt, and liquid financial assets. We then build a rich quantitative lifecycle model with heterogeneous returns that matches both the composition and concentration of wealth as well as key aggregate facts about housing and mortgage markets in the US. We use the model to decompose the importance of return heterogeneity,long-term fixed rate mortgages and refinancing, as well as owner-occupied housing on the average MPC. The decomposition exercises show that return heterogeneity and illiquid owner-occupied housing are the two most important factors that generate a high average MPC, and illiquid mortgage debt has a smaller, but nontrivial contribution. We use our model to compare the aggregate and distributional effects of a one-time stimulus payment to the effects of a mortgage debt relief program.
Discussant(s)
Kurt Mitman
,
Stockholm University
Adrien Auclert
,
Stanford University
Scott Baker
,
Northwestern University
David Berger
,
Duke University
JEL Classifications
- E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
- E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook