Report

Latent Heterogeneity in the Marginal Propensity to Consume


Abstract: We estimate the distribution of marginal propensities to consume (MPCs) using a novel clustering approach that generalizes the fuzzy C-means algorithm to regression settings. We apply the estimator to the 2008 stimulus payments, exploiting the randomized timing of disbursements, and find considerable heterogeneity in MPCs that varies by consumption good. We document observable determinants of this heterogeneity, without imposing ex ante assumptions on such relationships; MPCs correlate positively with income and the average propensity to consume, but much heterogeneity remains unexplained. The partial equilibrium response to the stimulus is twice that based on homogeneous estimates, highlighting the quantitative importance of heterogeneity.

Keywords: marginal propensity to consume; consumption; tax rebate; heterogeneous treatment effects; machine learning; clustering; C-means;

JEL Classification: D12; D91; E21; E32; E62;

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Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2019-11-01

Number: 902

Note: Revised August 2020.