WORKING PAPERS

This paper shows that standard consumption theory predicts a substantial marginal propensity to consume (MPC) out of transitory shocks, even among high-income and unconstrained households, when labor income level and risk are negatively correlated. Specifically,  a version of the two-period Kimball (1990b)’ model augmented to account for safe (high-income, low-risk) and risky (low-income, high-risk) households yields two key findings: i) safe and risky households have similar levels of liquid wealth. Intuitively, while the precautionary motive increases with income risk, the ability to self-insure hinges on income levels.  ii) Among unconstrained, safe households exhibit a higher MPC. This result is because absent wealth effects, higher income risk lowers the MPC. These findings imply that within the wealth distribution, there is a fraction of high-income, low-risk, and unconstrained households with high MPCs, the ``Safe Non-Hand-to-Mouth.'' Simulated models and empirical evidence from Italy and the US support this conclusion, revealing a significant trade-off between economic stimulus and insurance when using targeted transfers. 

This paper studies how monetary policy affects individual consumption in a Heterogeneous Agent New Keynesian (HANK) model with ex-ante heterogeneity in the income processes. In this model, lower-earning households face higher and more countercyclical income risk. This unequal incidence lowers their Marginal Propensity to Consume (MPC) relative to safer and higher-earning households at the same positive wealth level. In this environment, the effects of a monetary tightening operate along and within the wealth distribution, revealing that income risk heterogeneity amplifies the equilibrium response of aggregate consumption and generates a more persistent output contraction. Unlike standard HANKs, this amplification is driven by the larger elasticities of unconstrained households with higher earnings and lower risk, whose consumption share accounts for the bulk of aggregate consumption.

We study the role of heterogeneity in the revenues of individual firms for euro area macroeconomic dynamics. To this end, we specify two models: a standard aggregate vector autoregressive model (VAR) and an ``heterogeneous VAR'' (HVAR). The VAR model includes only aggregate data, while the HVAR model also incorporates the feedback loop between firms' revenue distribution and aggregate variables. Our results demonstrate that the behavior of firms' revenue distribution plays a significant role in explaining the dynamics of key euro area macroeconomic variables.

We elicit the intertemporal Marginal Propensity to Consume (iMPC) based on hypothetical different-size lottery winnings through questions in the 2023-24 Italian Survey of Consumer Expectations (ISCE). Survey respondents were asked to allocate three hypothetical lottery winning amounts (€1,000, €10,000. and €50,000) between consumption and saving in both the year following the survey and over the longer term. The iMPC for a €1,000 win declines from 26% in the first year to about 1% five years after the shock. Larger win amounts have a smaller impact in the first year and a larger impact in the long run. The iMPC for a €10,000 (€50,000) prize declines from 19% (15%) in the first year to 2.5% (4%) in year five. Regardless of the size of the shock, the iMPC shows a weak negative relation to the cash-on-hand amount and a negative relation to income risk. We show that calibrated simulations of incomplete market models with borrowing constraints, income risk, and household heterogeneity are broadly consistent with these empirical findings.