JJ Laffont Lecture

The marginal propensity to consume (MPC) is a key concept in macroeconomics. Quasi-experimental empirical evidence estimates large aggregate MPCs, around 40% annually. In this lecture, I analyze whether and how the most commonly used macroeconomic models can generate MPCs of this order of magnitude. One-asset heterogeneous agent models struggle, when plausibly calibrated, even with the addition of ex-ante preference heterogeneity or behavioral biases. Two-asset (liquid and illiquid) models are more successful in reconciling a large aggregate MPC with other aspects of the micro data on household portfolios.