Internal Seminar: Jeanne Comault (Sciences Po)

Heterogeneity in MPC Beyond Liquid Wealth: The Role of Permanent Earnings

While MPCs are mostly known to decrease with liquid wealth, I show that they are also increasing in the permanent component of earnings. In a standard model, permanent earnings raise MPCs because they reduce the ratio of risk-free-liquid-wealth-to-risky-future-earnings, strengthening precautionary behavior. This can explain two documented facts: (i) people with high levels of liquid wealth still have significant MPCs; (ii) MPCs do not decrease with current earnings although, like liquid wealth, they increase available resources. This prediction holds in survey data. The effect is large enough to explain the stylized facts. Numerical simulations match the survey results and stylized facts.