We begin by estimating the marginal propensity to consume
out of wealth with more modern econometric procedures.
Our primary interest centers around the derivative of [C.sub.1] with respect to T which characterizes the marginal propensity to consume
(MPC) out of a deficit financed tax cut.
Baseline Calibration: Targets and Parameter Values Calibration targets (a) Real GDP growth g 1.7% Real interest rate r 5% Debt-to-GDP ratio D 130% Coefficient of relative risk aversion Marginal propensity to consume
m 6% Frisch elasticity of labor supply Average duration of debt [T.sub.m] 5 Price elasticity of demand Marginal cost elasticity w.r.t.
Consequently, the marginal propensity to consume
out of stock market wealth may be smaller than that to consume out of total wealth.
These figures suggest a marginal propensity to consume
out of housing wealth of 0.04/0.83 = 0.05, in line with the estimates often cited by analysts and policymakers.
The graph makes clear the key importance of the "fundamental psychological law" that the marginal propensity to consume
is less than unity.
To determine if the marginal propensity to consume
(and the other coefficients) of these who groups differ, we use a likelihood ratio test (a Chow type test).(5) (Given that [y.sub.2] is the proxy for permanent income, the marginal propensity to spend estimates coule significnatly depend on [y.sub.2] and its variability.
In the "modified" PIH, the marginal propensity to consume
out of transitory income is positive, but smaller than the marginal propensity to consume
out of permanent income [e.g., Laumas and Laumas (1976)].
It is shown that the marginal propensity to consume
out of anticipated labour income is positive if and only if the (intratemporal) elasticity of substitution between consumption and leisure at a given age is greater than the (intertemporal) elasticity of substitution between expenditure on consumption and leisure across two different ages.
It has to be noted that the integration of monetary sector and government's budget constraint in Samuelson's (1939) model increases the value interval of marginal propensity to consume
for which the diachronic movement of income is oscillatory.
For this exercise, we will assume that our estimated marginal propensities to consume before-tax dividends in tables 2 and 6 come from a constant marginal propensity to consume
(MPC) after-tax dividends, or
This book makes an attempt to estimate some macro-economic structural parameters like marginal propensity to consume
, marginal propensity to save, capital-output ratios etc.