Papers

Papers published using the Econ-ARK toolkit.

cstwMPC

The Distribution of Wealth and the Marginal Propensity to Consume Forthcoming, Quantitative Economics

June 3, 2017

http://www.econ2.jhu.edu/people/ccarroll/papers/cstwMPC/

In a model calibrated to match micro- and macroeconomic evidence on household income dynamics, we show that a modest degree of heterogeneity in household preferences or beliefs is sufficient to match empirical measures of wealth inequality in the U.S. The hegerogeneity-augmented model’s predictions are consistent with microeconomic evidence that suggests that the annual marginal propensity to consume (MPC) is much larger than the roughly 0.04 implied by commonly-used macroeconomic models (even ones including some heterogeneity). The high MPC arises because many consumers hold little wealth despite having a strong precautionary motive. Our model also plausibly predicts that the aggregate MPC can differ greatly depending on how the shock is distributed across households (depending, e.g., on their wealth, or employment status).



cAndCwithStickyE

Sticky Expectations and Consumption Dynamics

February 22, 2018

http://www.econ2.jhu.edu/people/ccarroll/papers/cAndCwithStickyE/

Macroeconomic models often invoke consumption “habits” to explain the substantial persistence of aggregate consumption growth. But a large literature has found no evidence of habits in microeconomic datasets that measure the behavior of individual households. We show that the apparent conflict can be explained by a model in which consumers have accurate knowledge of their personal circumstances but ‘sticky expectations’ about the macroeconomy. In our model, the persistence of aggregate consumption growth reflects consumers’ imperfect attention to aggregate shocks. Our proposed degree of (macro) inattention has negligible utility costs, because aggregate shocks constitute only a tiny proportion of the uncertainty that consumers face.