The distribution of wealth and the marginal propensity to consume

Abstract

We present a macroeconomic model calibrated to match both microeconomic and macroeconomic evidence on household income dynamics. When the model is extended so that it can match empirical measures of wealth inequality in the U.S., we show that its predictions are consistent with extensive microeconomic evidence that suggests that the annual marginal propensity to consume (MPC) is much larger than the figure of roughly 0.04 implied by commonly-used macroeconomic models (even ones including some heterogeneity). Our model also plausibly predicts that the aggregate MPC can differ greatly depending on how the shock is distributed across households (e.g., low-wealth versus high-wealth, or employed versus unemployed).