Heterogenous Consumption Responses and Wealth Inequality over the Business Cycle

Rachel Joy Forshaw

doi:10.1007/978-3-031-49105-4_39

Heterogenous Consumption Responses and Wealth Inequality over the Business Cycle

Research output: Chapter in Book/Report/Conference proceeding › Conference contribution

Abstract

Recent research has highlighted the importance of heterogeneity in the marginal propensity to consume (MPC) out of transitory income shocks for the efficacy of monetary and fiscal policy. However, work on estimating the distribution of MPCs remains scant and typically assumes that an individual’s MPC remains constant over time. Using the US Panel Study of Income Dynamics (PSID), I calibrate a model of microeconomic wealth and discount rate heterogeneity with aggregate shocks over the Great Recession of 2008, a historical ‘upper bound’ in terms of the dynamics of the wealth distribution in recessionary times. Using a reduced-form model, I estimate the degree of heterogeneity in MPCs both over the population and over the business cycle and show that a state-invariant MPC distribution is irreconcilable with empirical changes in the wealth distribution.

Original language	English
Title of host publication	Applied Economic Research and Trends. ICOAE 2023
Editors	Nicholas Tsounis, Aspasia Vlachvei
Publisher	Springer
Pages	667–700
Number of pages	34
ISBN (Electronic)	9783031491054
ISBN (Print)	9783031491047
DOIs	https://doi.org/10.1007/978-3-031-49105-4_39
Publication status	Published - 29 Jan 2024
Event	2023 International Conference on Applied Economics - Brno, Czech Republic Duration: 29 Jun 2023 → 1 Jul 2023 https://www.i-coae.com

Publication series

Name	Springer Proceedings in Business and Economics
ISSN (Print)	2198-7246
ISSN (Electronic)	2198-7254

Conference

Conference	2023 International Conference on Applied Economics
Abbreviated title	ICOAE 2023
Country/Territory	Czech Republic
City	Brno
Period	29/06/23 → 1/07/23
Internet address	https://www.i-coae.com

Keywords

Business cycles
Consumption
Heterogeneous agents
Income shocks

ASJC Scopus subject areas

General Economics,Econometrics and Finance
General Business,Management and Accounting

Access to Document

10.1007/978-3-031-49105-4_39

Cite this

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title = "Heterogenous Consumption Responses and Wealth Inequality over the Business Cycle",

abstract = "Recent research has highlighted the importance of heterogeneity in the marginal propensity to consume (MPC) out of transitory income shocks for the efficacy of monetary and fiscal policy. However, work on estimating the distribution of MPCs remains scant and typically assumes that an individual{\textquoteright}s MPC remains constant over time. Using the US Panel Study of Income Dynamics (PSID), I calibrate a model of microeconomic wealth and discount rate heterogeneity with aggregate shocks over the Great Recession of 2008, a historical {\textquoteleft}upper bound{\textquoteright} in terms of the dynamics of the wealth distribution in recessionary times. Using a reduced-form model, I estimate the degree of heterogeneity in MPCs both over the population and over the business cycle and show that a state-invariant MPC distribution is irreconcilable with empirical changes in the wealth distribution.",

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editor = "Nicholas Tsounis and Aspasia Vlachvei",

booktitle = "Applied Economic Research and Trends. ICOAE 2023",

note = "2023 International Conference on Applied Economics, ICOAE 2023 ; Conference date: 29-06-2023 Through 01-07-2023",

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Forshaw, RJ 2024, Heterogenous Consumption Responses and Wealth Inequality over the Business Cycle. in N Tsounis & A Vlachvei (eds), Applied Economic Research and Trends. ICOAE 2023. Springer Proceedings in Business and Economics, Springer, pp. 667–700, 2023 International Conference on Applied Economics, Brno, Czech Republic, 29/06/23. https://doi.org/10.1007/978-3-031-49105-4_39

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N2 - Recent research has highlighted the importance of heterogeneity in the marginal propensity to consume (MPC) out of transitory income shocks for the efficacy of monetary and fiscal policy. However, work on estimating the distribution of MPCs remains scant and typically assumes that an individual’s MPC remains constant over time. Using the US Panel Study of Income Dynamics (PSID), I calibrate a model of microeconomic wealth and discount rate heterogeneity with aggregate shocks over the Great Recession of 2008, a historical ‘upper bound’ in terms of the dynamics of the wealth distribution in recessionary times. Using a reduced-form model, I estimate the degree of heterogeneity in MPCs both over the population and over the business cycle and show that a state-invariant MPC distribution is irreconcilable with empirical changes in the wealth distribution.

AB - Recent research has highlighted the importance of heterogeneity in the marginal propensity to consume (MPC) out of transitory income shocks for the efficacy of monetary and fiscal policy. However, work on estimating the distribution of MPCs remains scant and typically assumes that an individual’s MPC remains constant over time. Using the US Panel Study of Income Dynamics (PSID), I calibrate a model of microeconomic wealth and discount rate heterogeneity with aggregate shocks over the Great Recession of 2008, a historical ‘upper bound’ in terms of the dynamics of the wealth distribution in recessionary times. Using a reduced-form model, I estimate the degree of heterogeneity in MPCs both over the population and over the business cycle and show that a state-invariant MPC distribution is irreconcilable with empirical changes in the wealth distribution.

KW - Business cycles

KW - Consumption

KW - Heterogeneous agents

KW - Income shocks

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Heterogenous Consumption Responses and Wealth Inequality over the Business Cycle

Abstract

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Keywords

ASJC Scopus subject areas

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