Job Market Paper

Fiscal Policy and The Secular Divergence of the Marginal Propensity to Consume

Pablo Sánchez

This paper studies how the distribution of marginal propensities to consume (MPCs) has evolved and its implications for fiscal policy. I document a secular divergence: MPCs have risen among low-wealth households and fallen among middle-wealth households. Liquid wealth moved in the opposite direction. Over the same period, homeownership declined, rent burdens rose at the bottom of the wealth distribution, and portfolios shifted toward liquid assets. I build a quantitative life-cycle model to rationalize these facts and argue that the MPC divergence is driven by higher house prices and rents and lower interest rates. Higher house prices put homeownership out of reach for low-wealth households, while higher rents push more of them into liquidity constraints. Among middle-wealth households, larger down payments delay homeownership and encourage saving, while lower interest rates shift these savings toward liquid assets. The resulting increase in liquidity reduces the share of liquidity-constrained middle-wealth households. As a result, transfers targeted toward low-wealth households have become increasingly powerful.

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