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Annual Review of Economics

Volume 14, 2022

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.

Keyword(s): borrowing constraints, consumption, hand-to-mouth, heterogeneity, income risk, JEL D15, JEL D31, JEL D52, JEL E21, JEL E62, JEL E71, JEL G51, liquidity, marginal propensity to consume, market incompleteness, precautionary saving, wealth distribution

Erratum

An erratum has been published for this article:
Erratum: The Marginal Propensity to Consume in Heterogeneous Agent Models
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/content/journals/10.1146/annurev-economics-080217-053444
2022-08-12
2025-04-26
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The Marginal Propensity to Consume in Heterogeneous Agent Models
Annual Review of Economics 14, 747 (2022); https://doi.org/10.1146/annurev-economics-080217-053444
/content/journals/10.1146/annurev-economics-080217-053444
/content/journals/10.1146/annurev-economics-080217-053444
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  • Article Type: Review Article

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