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Wednesday, February 27, 2013

'Fiscal Policy and MPC Heterogeneity'

Income growth for the working class has not kept pace with productivity. Instead, much of the growth has gone to the top of the income distribution (in my view, more than can be justified by any reasonable estimate of the marginal productivity of the wealthiest among us). It appears that redirecting that income so that the gap -- positive or negative -- between productivity and income growth falls is also stimulative (and the stimulus is strongest when the income goes to households at the lowest rungs of the income distribution):

Fiscal Policy and MPC Heterogeneity, by Owen Zidar: Tullio Jappelli and Luigi Pistaferri have a recent paper called Fiscal Policy and MPC Heterogeneity. Here’s an interesting figure from it that shows how MPC varies by cash-on-hand:

Mpc[1]

They aren’t the only ones who document MPC heterogeneity. Dynan, Skinner, Zeldes have a nice JPE 2004 paper on this and so does Parker (AER 1999).

So why does this matter? As Tullio Jappelli and Luigi Pistaferri put it:

the results have important implications for the evaluation of fiscal policy, and for predicting household responses to tax reforms and redistributive policies. In particular, we find that a debt-financed increase in transfers of 1 percent of national disposable income targeted to the bottom decile of the cash-on-hand distribution would increase aggregate consumption by 0.82 percent.

    Posted by on Wednesday, February 27, 2013 at 02:07 PM in Economics, Fiscal Policy | Permalink  Comments (19)

          


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