Estimating the Marginal Propensity to Consume Using the Distributions of Income, Consumption, and Wealth Estimating the Marginal Propensity to Consume Using the Distributions of Income, Consumption, and Wealth

By Jonathan Fisher, David Johnson, Timothy Smeeding, and Jeffrey P. Thompson

In contrast to most recent studies of economic inequality, which separately examine income, consumption, and wealth inequality, this paper, using Panel Study of Income Dynamics (PSID) data from 1999 through 2013, considers the relationship between the three factors to determine whether the effects of changes in income on consumption are more pronounced at higher or lower levels of wealth. The authors—the first to use the PSID to estimate the marginal propensity to consume (MPC) by wealth—find that the MPC is indeed lower at higher wealth quintiles, suggesting that lower-wealth households respond more to changes in income than do higher-wealth households. They also find that the overall MPC lies at the low end of the range examined in other research, but this discrepancy is to be expected, the authors conclude, because the PSID documents two-year changes in income and consumption, while other studies use changes over shorter periods of time.

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