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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

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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
2024-04-20
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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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