Universität Bonn

Department of Economics

MEF-Seminar Summersemster 2024

Jeanne Commault (Sciences Po), 17.04.2024

The distribution of marginal propensities to consume (MPCs) is central to the transmission of shocks and policies to the economy. Recent empirical findings challenge the standard view that this distribution is mostly explained by liquidity constraints: (i) some people with substantial liquid wealth have a high MPC; (ii) current earnings, which should relax the constraint, do not reduce the MPC. I show that, in the standard consumption model, the permanent component of earnings is another important determinant of the MPC and its impact can explain (i)-(ii). An increase in the permanent component mechanically raises the magnitude of future earnings shocks, thus the risk that people face, forcing them to save more and making them more responsive to a windfall. Survey data support a large and positive effect of permanent earnings on the MPC. Numerical simulations can replicate quantitatively those survey findings in a model with rich earnings risk.
Wednesday, 17.04.24 - 12:15 AM - 01:30 AM
"Heterogeneity in MPC Beyond Liquid Wealth: The Role of Permanent Earnings'"
Juridicum, Adenauerallee 24-42
Faculty Room
not required
Institute for Macroeconomics and Econometrics
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