The Wealthy Hand-to-Mouth
Greg Kaplan
Princeton University
Gianluca Violante
New York University
Justin Weidner
Princeton University
In preparation for the next BPEA volume
Yale, April 8th 2014
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 1 /46
Understanding the joint dynamics of (c, y)
• PIH and buffer-stock model: organizing frameworks
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 2 /46
Understanding the joint dynamics of (c, y)
• PIH and buffer-stock model: organizing frameworks
• Several anomalies unexplained by standard theory:
1. Micro: c overreacts to predictable y growth
Johnson, Parker, and Souleles (2006)
2. Macro I: C overreacts to predictable Y growth
3. Macro II: ∆C uncorrelated with r
Campbell and Mankiw (1989, 1990, 1991)
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 2 /46
Understanding the joint dynamics of (c, y)
• PIH and buffer-stock model: organizing frameworks
• Several anomalies unexplained by standard theory:
1. Micro: c overreacts to predictable y growth
Johnson, Parker, and Souleles (2006)
2. Macro I: C overreacts to predictable Y growth
3. Macro II: ∆C uncorrelated with r
Campbell and Mankiw (1989, 1990, 1991)
• Solution: sizable share of hand-to-mouth (HtM) households
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 2 /46
Measurement of HtM households
• Traditional: “one-asset” (net worth) view of the data
◮ Two groups:
1. Non-HtM: substantial net worth
2. HtM: zero net worth
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 3 /46
Measurement of HtM households
• Traditional: “one-asset” (net worth) view of the data
◮ Two groups:
1. Non-HtM: substantial net worth
2. HtM: zero net worth
• Alternative: “two-asset” (liquid-illiquid) view of the data
◮ Three groups:
1. Non-HtM: substantial liquid wealth
2. Poor-HtM: no liquid wealth and no illiquid wealth
3. Wealthy-HtM: no liquid wealth, but substantial illiquid wealth
• Traditional view misses the Wealthy HtM
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 3 /46
The W-HtM: questions
1. When is W-HtM behavior optimal?
2. How do we identify W-HtM households in survey data?
3. What is the share of W-HtM across countries?
US, CA, AU, UK, DE, FR, IT, ES
4. Portfolio? Demographics? Persistence of their status?
5. High MPC out of transitory y shocks? Evidence from PSID
6. What are the implications of W-HtM for fiscal policy?
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 4 /46
TOY
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
MODEL
p. 5 /46
Environment
• At t = 0: portfolio choice between liquid and illiquid asset (m1 , a)
◮ Illiquid asset: gross return R at t = 2, and consumption
commitment κa at t = 1
• At t = 1: receive income y1 , consume c1 , save m2 (no credit)
• At t = 2: receive income y2 , consume c2
• Preferences: u(c1 ) + u(c2 ) (no discounting)
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 6 /46
Environment
• At t = 0: portfolio choice between liquid and illiquid asset (m1 , a)
◮ Illiquid asset: gross return R at t = 2, and consumption
commitment κa at t = 1
• At t = 1: receive income y1 , consume c1 , save m2 (no credit)
• At t = 2: receive income y2 , consume c2
• Preferences: u(c1 ) + u(c2 ) (no discounting)
• Definition of HtM status:
◮ N-HtM: m2 > 0 &
a>0
→
c1 = c2
◮ P-HtM: m2 = 0 &
a=0
→
c1 < c2
◮ W-HtM: m2 = 0
a>0
→
c1 << c2
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
&
p. 6 /46
Portfolio allocation
max u(c1 )
+
u(c2 )
s.t.
m1 + a
c1 + m2
c2
=
=
=
1, a ≥ 0, m1 ≥ 0
y1 + m1 − κa
y2 + m2 + Ra
{m1 ,a}
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 7 /46
Portfolio allocation
max u(c1 )
+
u(c2 )
s.t.
m1 + a
c1 + m2
c2
=
=
=
1, a ≥ 0, m1 ≥ 0
y1 + m1 − κa
y2 + m2 + Ra
{m1 ,a}
• Long-run Euler equation
∂m2
∂m2
′
≥ u (c2 ) R +
u (c1 ) 1 + κ +
∂a
∂a
′
• Determines endowment points at t = 1, 2:
{y1 + (1 − a) − κa, y2 + Ra}
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 7 /46
Consumption/saving at t
=1
max u (c1 )
+
u (c2 )
s.t.
c1 + m2
c2
m2
=
=
≥
y1 + 1 − (1 + κ) a
y2 + Ra + m2
0
{c1 ,m2 }
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 8 /46
Consumption/saving at t
=1
max u (c1 )
+
u (c2 )
s.t.
c1 + m2
c2
m2
=
=
≥
y1 + 1 − (1 + κ) a
y2 + Ra + m2
0
{c1 ,m2 }
• Short-run Euler equation (t = 1):
u′ (c1 ) ≥ u′ (c2 )
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 8 /46
Consumption/saving at t
=1
max u (c1 )
+
u (c2 )
s.t.
c1 + m2
c2
m2
=
=
≥
y1 + 1 − (1 + κ) a
y2 + Ra + m2
0
{c1 ,m2 }
• Short-run Euler equation (t = 1):
u′ (c1 ) ≥ u′ (c2 )
• Long-run Euler equation (t = 0):
u′ (c1 ) ≥
R
· u′ (c2 )
1+κ
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 8 /46
Hand-to-mouth behavior
• Short-run EE ⇒ HtM if:
y2 > y1 + 1
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
⇒
m2 = 0
p. 9 /46
Hand-to-mouth behavior
• Short-run EE ⇒ HtM if:
y2 > y1 + 1
⇒
m2 = 0
• Long-run EE + u CES ⇒ W-HtM iff:
R
>
1+κ
y2
y1 + 1
ε1
,
IES = ε
• Trade-off: higher c2 for lower consumption smoothing btw periods
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 9 /46
Hand-to-mouth behavior
• Short-run EE ⇒ HtM if:
y2 > y1 + 1
⇒
m2 = 0
• Long-run EE + u CES ⇒ W-HtM iff:
R
>
1+κ
y2
y1 + 1
ε1
,
IES = ε
• Trade-off: higher c2 for lower consumption smoothing btw periods
• W-HtM has high MPC out of unexpected (small) transfer at t = 1
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 9 /46
M EASUREMENT S TRATEGY
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 10 /46
From theory to measurement
• Two kinks in the household budget constraint:
1. Zero liquid wealth
(mt+1 = 0)
2. Unsecured credit limit
(mt+1 = −m)
• HtM households end the pay-period t at a kink
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 11 /46
From theory to measurement
• Two kinks in the household budget constraint:
1. Zero liquid wealth
(mt+1 = 0)
2. Unsecured credit limit
(mt+1 = −m)
• HtM households end the pay-period t at a kink
• Mismatch in timing of y receipt and c expenditures
• y receipt at the start of the pay-period, c throughout the pay-period
1. HtM at zero kink have positive avg. liquid wealth
2. HtM at credit limit have avg. liquid wealth above limit
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 11 /46
Identification of HtM in survey data
• A household is P-HtM at the zero kink if:
ait = 0,
and
0 ≤ mit ≤ m∗it
• A household is W-HtM at the zero kink if:
ait > 0,
and
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
0 ≤ mit ≤ m∗it
p. 12 /46
Identification of HtM in survey data
• A household is P-HtM at the zero kink if:
ait = 0,
and
0 ≤ mit ≤ m∗it
• A household is W-HtM at the zero kink if:
ait > 0,
and
0 ≤ mit ≤ m∗it
• A household is P-HtM at the credit limit if:
ait = 0,
mit ≤ 0 and
mit ≤ m∗it − mit ,
• A household is W-HtM at the credit limit if:
ait > 0,
mit ≤ 0 and
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
mit ≤ m∗it − mit
p. 12 /46
Graphical illustration of HtM behavior
Cash in hand
Cash in hand
−m + yt
yt
t
m̄t =
m̄t =
yt
2
t
t
t+1
(a) HtM at the zero kink
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
yt
2
−m
−m
t
t+1
(b) HtM at the credit limit
p. 13 /46
Graphical illustration of HtM behavior
Cash in hand
Cash in hand
−m + yt
yt
t
m̄t =
m̄t =
yt
2
t
t
t+1
(c) HtM at the zero kink
• Suggests: m∗it =
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
yt
2
−m
−m
t
t+1
(d) HtM at the credit limit
yit
2
p. 13 /46
Bias in estimator of HtM share with m∗it
= yit /2
1. Average balances: downward bias
• It misses some HtM households
• It never mistakes a N-HtM for HtM
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 14 /46
Bias in estimator of HtM share with m∗it
= yit /2
1. Average balances: downward bias
• It misses some HtM households
• It never mistakes a N-HtM for HtM
2. Balances at a random point during the pay-period:
• It misses some cases of HtM households
• It mistakes a N-HtM for HtM only if the household has liquid
balances, at the end of the pay-period, less that yit /2 away
from the threshold
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 14 /46
DATA
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 15 /46
Surveys on household portfolios
• United States: Survey of Consumer Finances 1989-2010
• Canada: Survey of Financial Security 2005
• Australia: Household, Income, and Labour Dynamics 2010
• United Kingdom: Wealth and Assets Survey 2010
• Germany, France, Italy, and Spain: Household Finance and
Consumption Survey 2008-10
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 16 /46
Surveys on household portfolios
• United States: Survey of Consumer Finances 1989-2010
• Canada: Survey of Financial Security 2005
• Australia: Household, Income, and Labour Dynamics 2010
• United Kingdom: Wealth and Assets Survey 2010
• Germany, France, Italy, and Spain: Household Finance and
Consumption Survey 2008-10
Sample selection: head 22-79 year-old, positive income,
Sample size per survey: ∼ 5, 000 households
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
(oversampling rich)
p. 16 /46
Empirical details
• Pay-period: Bi-weekly (supported by CEX)
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 17 /46
Empirical details
• Pay-period: Bi-weekly (supported by CEX)
• Income: All labor income plus government transfers that are
regular inflows of liquid wealth, before taxes
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 17 /46
Empirical details
• Pay-period: Bi-weekly (supported by CEX)
• Income: All labor income plus government transfers that are
regular inflows of liquid wealth, before taxes
• Liquid wealth: Checking, savings, money market and call
accounts plus directly held mutual funds, stocks and corporate
bonds, plus imputed cash holdings, net of credit card debt
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 17 /46
Empirical details
• Pay-period: Bi-weekly (supported by CEX)
• Income: All labor income plus government transfers that are
regular inflows of liquid wealth, before taxes
• Liquid wealth: Checking, savings, money market and call
accounts plus directly held mutual funds, stocks and corporate
bonds, plus imputed cash holdings, net of credit card debt
• Illiquid wealth: Value of housing and real estate net of mortgages
and HELOC, private retirement accounts, cash value of life
insurance, certificates of deposit, and saving bonds
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 17 /46
Empirical details
• Pay-period: Bi-weekly (supported by CEX)
• Income: All labor income plus government transfers that are
regular inflows of liquid wealth, before taxes
• Liquid wealth: Checking, savings, money market and call
accounts plus directly held mutual funds, stocks and corporate
bonds, plus imputed cash holdings, net of credit card debt
• Illiquid wealth: Value of housing and real estate net of mortgages
and HELOC, private retirement accounts, cash value of life
insurance, certificates of deposit, and saving bonds
• Borrowing limit: One month of income (for comparability)
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 17 /46
R ESULTS : U NITED S TATES
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 18 /46
.5
How large is the share of HtM in the US?
P−HtM
0
.1
.2
.3
.4
W−HtM
1989 1992 1995 1998 2001 2004 2007 2010
• 30% of U.S. households are HtM, and 2/3 of them are W-HtM
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 19 /46
.5
What is the portfolio composition for W-HtM?
0
.1
.2
.3
.4
Both other and housing wealth
Only housing wealth
Other illiquid but no housing wealth
1989 1992 1995 1998 2001 2004 2007 2010
• Mostly homeowners, but 1/5 of W-HtM are without any real estate
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 20 /46
0
.1
Share of HtM among Homeowners
.2
.3
.4
.5
.6
.7
W-HtM among homeowners, by leverage ratio
=0
0−.3
.3−.6
.6−.9
.9−1.2 1.2−1.5 1.5−1.8 1.8−2.1 2.1−2.4 2.4−2.7 2.7−3
Leverage Ratio
• Misra-Surico (2013): homeowners with big mortgages had strong
c response to 2001 and 2008 fiscal stimulus payments
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 21 /46
P−HtM
P−HtM
.3
.4
.2
.3
1992
1995
1998
2001
2004
2007
2010
0
.1
.2
.1
0
1989
1992
1995
1998
2001
2004
2007
2010
(b) Pay-period of 1 month
W−HtM
P−HtM
.3
.2
.1
1989
1992
1995
1998
2001
2004
2007
2010
(c) Reported credit limit
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
0
.1
.2
.3
.4
P−HtM
.4
W−HtM
1989
.5
.5
(a) y-weighted share of HtM
0
W−HtM
.4
W−HtM
.5
.5
Robustness
1989
1992
1995
1998
2001
2004
2007
2010
(d) Vehicles in illiquid wealth
p. 22 /46
More robustness
Baseline
Higher illiquid wealth cutoff
Businesses as illiquid assets
Direct as illiquid assets
Other valuables as illiquid assets
Excludes cc-puzzle households
HELOCs as liquid debt
Disp. income (via TAXSIM)
Comm. cons. - beg. of period
Comm. cons. - end of period
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
P-HtM
0.121
0.121
0.114
0.120
0.117
0.163
0.120
0.121
0.102
0.149
W-HtM
0.192
0.192
0.193
0.217
0.196
0.183
0.181
0.188
0.166
0.272
HtM
0.312
0.312
0.307
0.337
0.312
0.346
0.301
0.309
0.268
0.421
HtM-NW
0.137
0.137
0.129
0.137
0.132
0.177
0.135
0.137
0.116
0.174
p. 23 /46
More robustness
Baseline
Higher illiquid wealth cutoff
Businesses as illiquid assets
Direct as illiquid assets
Other valuables as illiquid assets
Excludes cc-puzzle households
HELOCs as liquid debt
Disp. income (via TAXSIM)
Comm. cons. - beg. of period
Comm. cons. - end of period
P-HtM
0.121
0.121
0.114
0.120
0.117
0.163
0.120
0.121
0.102
0.149
W-HtM
0.192
0.192
0.193
0.217
0.196
0.183
0.181
0.188
0.166
0.272
HtM
0.312
0.312
0.307
0.337
0.312
0.346
0.301
0.309
0.268
0.421
HtM-NW
0.137
0.137
0.129
0.137
0.132
0.177
0.135
0.137
0.116
0.174
• Estimates based on net worth miss at least half of HtM
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 23 /46
.4
Age profile of HtM households
P−HtM
0
.1
.2
.3
W−HtM
20
40
60
80
Age
• P-HtM: young, whereas W-HtM: middle-age
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 24 /46
2
.8
Do W-HtM look more like P-HtM or N-HtM?
1.5
.5
P−HtM
0
0
W−HtM
N−HtM
20
40
60
80
20
40
Age
60
80
Age
(a) Fraction married
.3
80
(b) Number of children
P−HtM
.1
40
Fraction
.2
60
W−HtM
N−HtM
20
20
P−HtM
0
W−HtM
N−HtM
0
Thousands of 2010 USD
P−HtM
1
Number
.6
.4
.2
Fraction
W−HtM
N−HtM
40
60
Age
(c) Median income
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
80
20
40
60
80
Age
(d) Frac. w/ unemp. member
p. 25 /46
300
N−HtM
200
Thousands of 2010 USD
10
5
W−HtM
100
P−HtM
15
W−HtM
N−HtM
0
0
Thousands of 2010 USD
20
Do W-HtM look more like P-HtM or N-HtM?
20
40
60
80
20
40
60
80
(a) Median net liquid wealth
(b) Median net illiquid wealth
1
Age
1
Age
W−HtM
N−HtM
.6
.4
.2
0
0
.2
.4
.6
.8
N−HtM
.8
W−HtM
20
40
60
Age
(c) Fraction in housing
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
80
20
40
60
80
Age
(d) Fraction in ret. accounts
p. 26 /46
Persistence of HtM status
07 → 09
P
W
N
Ergodic
P
0.548
0.101
0.055
0.126
W
0.127
0.455
0.129
0.191
N
0.326
0.444
0.816
0.683
• Expected durations:
◮ P-HtM status: 4.5 years
◮ W-HtM status: 3.5 years
◮ N-HtM status: 11 years
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 27 /46
Summary on P-HtM vs W-HtM
P-HtM
1/10 of population
young
low income
no wealth
–
persistent state
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
W-HtM
1/5 of population
middle-age
middle/high income
high illiquid wealth
portfolio like N-HtM
more transient
p. 28 /46
Summary on P-HtM vs W-HtM
P-HtM
1/10 of population
young
low income
no wealth
–
persistent state
W-HtM
1/5 of population
middle-age
middle/high income
high illiquid wealth
portfolio like N-HtM
more transient
• Conclusion: they should be modelled as two different groups!
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 28 /46
C ROSS -C OUNTRY C OMPARISON
∼ 2010
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 29 /46
.5
Cross-country comparison: share of HtM
P−HtM
0
.1
.2
.3
.4
W−HtM
US
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
CA
AU
UK
DE
FR
IT
ES
p. 30 /46
.5
Cross-country comparison: share of HtM
P−HtM
0
.1
.2
.3
.4
W−HtM
US
CA
AU
UK
DE
FR
IT
ES
• Sizable variation in share of HtM
• In all countries, W-HtM twice as many as P-HtM
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 30 /46
.5
Cross-country comparison: portfolio of W-HtM
0
.1
.2
.3
.4
Other illiquid but no housing wealth
Only housing wealth
Both other and housing wealth
US
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
CA
AU
UK
DE
FR
IT
ES
p. 31 /46
.5
Cross-country comparison: portfolio of W-HtM
0
.1
.2
.3
.4
Other illiquid but no housing wealth
Only housing wealth
Both other and housing wealth
US
CA
AU
UK
DE
FR
IT
ES
• Big variation in portfolio composition
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 31 /46
.3
Fraction of households
.05
.1
.15
.2
.25
0
0
Fraction of households
.05
.1
.15
.2
.25
.3
Cross-country comparison: distribution of m/y
−10
−5
0
5
10
Net liquid wealth to monthly labor income ratio
−10
Fraction of households
.05
.1
.15
.2
.25
.3
(b) United Kingdom
0
0
Fraction of households
.05
.1
.15
.2
.25
.3
(a) United States
−5
0
5
10
Net liquid wealth to monthly labor income ratio
−10
−5
0
5
10
Net liquid wealth to monthly labor income ratio
(c) Italy
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
−10
−5
0
5
10
Net liquid wealth to monthly labor income ratio
(d) Spain
p. 32 /46
.4
P−HtM
P−HtM
.2
0
.1
.2
.1
0
22−24 25−29 30−34 35−39 40−44 45−49 50−54 55−59 60−64 65−69 70−74 75−79
20−24 25−29 30−34 35−39 40−44 45−49 50−54 55−59 60−64 65−69 70−74 75−79
Age
Age
W−HtM
P−HtM
.2
.1
0
0
.1
.2
.3
P−HtM
.3
W−HtM
(b) United Kingdom
.4
(a) United States
.4
W−HtM
.3
W−HtM
.3
.4
Cross-country comparison: age profile of HtM
22−24 25−29 30−34 35−39 40−44 45−49 50−54 55−59 60−64 65−69 70−74 75−79
22−24 25−29 30−34 35−39 40−44 45−49 50−54 55−59 60−64 65−69 70−74 75−79
Age
Age
(c) Italy
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
(d) Spain
p. 33 /46
MPC
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
OF THE
W-H T M
p. 34 /46
MPC out of transitory income shocks
• Do W-HtM (and P-HtM) respond strongly to transitory y shocks?
• Challenges:
1. Need panel data on income, consumption, and wealth
2. Individual income shocks are not directly observed
• Solutions:
1. Bi-annual data from 1999-2011 waves of the PSID
2. Identification strategy from Blundell-Pistaferri-Preston (2008)
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 35 /46
BPP identification strategy
• Residual log income is a sum of permanent + i.i.d. components:
∆ log yit = ηit + ∆εit
• Transmission coefficient of shock ε into c:
cov (∆cit , εit )
M P Cε ≡
var (εit )
• Assume households have no foresight about future shocks:
cov (∆cit , ηi,t+1 ) = cov (∆cit , εi,t+1 ) = 0
• Then M P Cε can be estimated as:
cov (∆cit , ∆yi,t+1 )
\
M
P Cε =
cov (∆yit , ∆yi,t+1 )
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 36 /46
Results
\
M
P Cε
Baseline
P-HtM
W-HtM
N-HtM
HtM-NW
N-HtM-NW
0.243
0.301
0.127
0.229
0.201
(0.065)
(0.048)
(0.036)
(0.054)
(0.030)
Note: Boostrapped SE based on 250 repetitions
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 37 /46
Results
\
M
P Cε
Baseline
P-HtM
W-HtM
N-HtM
HtM-NW
N-HtM-NW
0.243
0.301
0.127
0.229
0.201
(0.065)
(0.048)
(0.036)
(0.054)
(0.030)
Note: Boostrapped SE based on 250 repetitions
• W-HtM are the group with the largest point estimate for the MPC
• Gap with the MPC of the N-HtM statistically significant
• Split based on net worth uninformative
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 37 /46
I MPLICATIONS
OF
W-H T M
BEHAVIOR
FOR FISCAL POLICY
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 38 /46
Implications of W-HtM for fiscal policy
• Ignoring that W-HtM are a separate group leads to a distorted
view of effects of fiscal policy
• Examples:
1. Consumption response to lump-sum transfer (e.g., FSP)
2. Size asymmetry in response to FSP
3. Optimal design (income targeting) of the FSP
4. Cross-country differences in aggregate C response to FSP
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 39 /46
Three alternative models (U.S. SCF 2010)
SIM-2: Standard Incomplete Markets model with 2 assets
• Kaplan and Violante (2014): transaction cost of $1,000
• Three types: P-HtM, W-HtM, and N-HtM
SIM-1: Standard Incomplete Markets model with one asset
• One asset version of KV, calibrated to net worth
• Fewer HtM: it misses all W-HtM
SP-S: SPender-Saver model
• Spenders (c = y) and Savers (forward looking as in SIM-1)
• Right number of HtM, but exaggerates their MPC (=1)
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 40 /46
MPCs out of $500 in the three alternative models
SIM-2
SIM-1
SP-S
P-HtM
W-HtM
N-HtM
HtM
N-HtM
HtM
N-HtM
Average
0.35
0.44
0.06
0.14
0.02
1.00
0.02
Low Income
0.34
0.37
0.16
0.15
0.04
1.00
0.04
Middle Income
0.38
0.44
0.09
0.11
0.02
1.00
0.02
High Income
0.31
0.52
-0.02
0.12
0.01
1.00
0.01
Age <=40
0.38
0.42
0.08
0.16
0.02
1.00
0.02
Age 40-60
0.30
0.42
0.01
0.11
0.01
1.00
0.01
Age >60
0.39
0.51
0.13
0.04
0.04
1.00
0.04
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 41 /46
Aggregate quarterly MPC
Transfer size
Model
SIM-2
SIM-1
SP-S
0.18
0.04
0.35
$50
0.29
0.05
0.35
$2,000
0.05
0.03
0.35
$500 – bottom tercile
0.26
0.07
0.50
$500 – top tercile
0.20
0.03
0.34
$500
Size asymmetry
Income targeting
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 42 /46
Aggregate quarterly MPC
Transfer size
Model
SIM-2
SIM-1
SP-S
0.18
0.04
0.35
$50
0.29
0.05
0.35
$2,000
0.05
0.03
0.35
$500 – bottom tercile
0.26
0.07
0.50
$500 – top tercile
0.20
0.03
0.34
$500
Size asymmetry
Income targeting
• SIM-1 (SP-S) under- (over-) estimates C response to FSP
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 42 /46
Aggregate quarterly MPC
Transfer size
Model
SIM-2
SIM-1
SP-S
0.18
0.04
0.35
$50
0.29
0.05
0.35
$2,000
0.05
0.03
0.35
$500 – bottom tercile
0.26
0.07
0.50
$500 – top tercile
0.20
0.03
0.34
$500
Size asymmetry
Income targeting
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 43 /46
Aggregate quarterly MPC
Transfer size
Model
SIM-2
SIM-1
SP-S
0.18
0.04
0.35
$50
0.29
0.05
0.35
$2,000
0.05
0.03
0.35
$500 – bottom tercile
0.26
0.07
0.50
$500 – top tercile
0.20
0.03
0.34
$500
Size asymmetry
Income targeting
• Large FSP have smaller bang-for-the-buck
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 43 /46
Aggregate quarterly MPC
Transfer size
Model
SIM-2
SIM-1
SP-S
0.18
0.04
0.35
$50
0.29
0.05
0.35
$2,000
0.05
0.03
0.35
$500 – bottom tercile
0.26
0.07
0.50
$500 – top tercile
0.20
0.03
0.34
$500
Size asymmetry
Income targeting
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 44 /46
Aggregate quarterly MPC
Transfer size
Model
SIM-2
SIM-1
SP-S
0.18
0.04
0.35
$50
0.29
0.05
0.35
$2,000
0.05
0.03
0.35
$500 – bottom tercile
0.26
0.07
0.50
$500 – top tercile
0.20
0.03
0.34
$500
Size asymmetry
Income targeting
• High-income (W-HtM) households consume their FSP as well
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 44 /46
.4
us
.05 .1 .15 .2 .25 .3 .35
Estimated MPC under SPS model
Estimated MPC under SIM−1 model
.05 .1 .15 .2 .25 .3 .35
.4
Cross-country differences in aggregate MPC out of $500
uk
ca
de
it
fr
au
it
de
ca
us uk
0
es
0
aufr
es
.1
.125
.15
.175
Estimated MPC under SIM−2 model
SIM−1 model
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
SPS model
.2
45 degree line
p. 45 /46
Conclusions
• Not all hand-to-mouth households are created equal...
• ...and it matters
Kaplan-Violante-Weidner, ”The Wealthy Hand-to-Mouth”
p. 46 /46