Heterogeneity in MPC Beyond Liquid Wealth: The Role of Persistent Earnings by Jeanne Commault

Join us for this weeks Macroeconomics Research Seminar, Autumn Term 2023.

Jeanne Commault, from the Department of Economics at Sciences Po, will present this weeks Macroeconomics seminar on Heterogeneity in MPC Beyond Liquid Wealth: The Role of Persistent Earnings.

Abstract

The distribution of marginal propensities to consume (MPCs) is central to analyses of the transmission of aggregate shocks and policies to the economy. Recent empirical findings challenge the standard view that this distribution is mostly explained by liquidity constraints as: (i) many people with substantial liquid wealth have a high MPC; (ii) current earnings, which should relax the constraint, tend on the contrary to raise the MPC. I show that a mechanism explaining (i)-(ii) is present in a standard consumption model with a transitory-permanent earnings process: when human capital is more risky than the other forms of capital owned, an increase in the permanent component that multiplies current and future earnings strengthens precautionary behavior and raises the MPC. In survey data, the permanent component of earnings correlates significantly and positively with the MPC and the effect is large enough to explain (i)-(ii). In numerical simulations, a model with a simple earnings process cannot account for (i)-(ii) but one with rich earnings risk can. Including rich earnings risk also raises the average MPC.

This seminar will be held on campus in the Economics Common Room at 1.30pm on Tuesday 28th November 2023. This event is open to all levels of study and is also open to the public. To register your place, please contact the seminar organisers.

This event is part of the Macroeconomics Research Seminar Series.