Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in...
Transcript of Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in...
![Page 1: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/1.jpg)
Two Papers About the MPC!
(Sort Of)
Chris CarrollThese are my views and not those of anybody else at CFPB
May 20, 2015
![Page 2: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/2.jpg)
Two Papers About the MPC!
(Sort Of)
Chris CarrollThese are my views and not those of anybody else at CFPB
May 20, 2015
![Page 3: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/3.jpg)
Two Papers About the MPC!(Sort Of)
Chris CarrollThese are my views and not those of anybody else at CFPB
May 20, 2015
![Page 4: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/4.jpg)
Two Papers About the MPC!(Sort Of)
Chris CarrollThese are my views and not those of anybody else at CFPB
May 20, 2015
![Page 5: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/5.jpg)
Why Do We Care About the MPC?
Nobody trying to make a forecast in 2009–2010 would ask:
![Page 6: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/6.jpg)
Why Do We Care About the MPC?
Nobody trying to make a forecast in 2009–2010 would ask:
![Page 7: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/7.jpg)
Why Do We Care About the MPC?
Nobody trying to make a forecast in 2009–2010 would ask:
![Page 8: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/8.jpg)
Why Do We Care About the MPC?
Nobody trying to make a forecast in 2009–2010 would ask:
� Big negative shocks to income
� Idea: Respond with big ‘stimulus’ tax cuts� In simplest Keynesian liquidity trap model: If ccc = c̄cc + (yyy − τ)κ� ⇒ multiplier on ∆τ is 1/(1− κ)− 1
� If κ = 0.75 then multiplier is 4− 1 = 3
− Some micro estimates of κ are this large
� If κ = 0.05 then multiplier is only ≈ 0.05
− 2007-vintage DSGE models mostly implied κ ∈ (0.00,0.05)
![Page 9: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/9.jpg)
Why Do We Care About the MPC?
Nobody trying to make a forecast in 2009–2010 would ask:
� Big negative shocks to income� Idea: Respond with big ‘stimulus’ tax cuts
� In simplest Keynesian liquidity trap model: If ccc = c̄cc + (yyy − τ)κ� ⇒ multiplier on ∆τ is 1/(1− κ)− 1
� If κ = 0.75 then multiplier is 4− 1 = 3
− Some micro estimates of κ are this large
� If κ = 0.05 then multiplier is only ≈ 0.05
− 2007-vintage DSGE models mostly implied κ ∈ (0.00,0.05)
![Page 10: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/10.jpg)
Why Do We Care About the MPC?
Nobody trying to make a forecast in 2009–2010 would ask:
� Big negative shocks to income� Idea: Respond with big ‘stimulus’ tax cuts� In simplest Keynesian liquidity trap model: If ccc = c̄cc + (yyy − τ)κ
� ⇒ multiplier on ∆τ is 1/(1− κ)− 1
� If κ = 0.75 then multiplier is 4− 1 = 3
− Some micro estimates of κ are this large
� If κ = 0.05 then multiplier is only ≈ 0.05
− 2007-vintage DSGE models mostly implied κ ∈ (0.00,0.05)
![Page 11: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/11.jpg)
Why Do We Care About the MPC?
Nobody trying to make a forecast in 2009–2010 would ask:
� Big negative shocks to income� Idea: Respond with big ‘stimulus’ tax cuts� In simplest Keynesian liquidity trap model: If ccc = c̄cc + (yyy − τ)κ� ⇒ multiplier on ∆τ is 1/(1− κ)− 1
� If κ = 0.75 then multiplier is 4− 1 = 3
− Some micro estimates of κ are this large
� If κ = 0.05 then multiplier is only ≈ 0.05
− 2007-vintage DSGE models mostly implied κ ∈ (0.00,0.05)
![Page 12: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/12.jpg)
Why Do We Care About the MPC?
Nobody trying to make a forecast in 2009–2010 would ask:
� Big negative shocks to income� Idea: Respond with big ‘stimulus’ tax cuts� In simplest Keynesian liquidity trap model: If ccc = c̄cc + (yyy − τ)κ� ⇒ multiplier on ∆τ is 1/(1− κ)− 1
� If κ = 0.75 then multiplier is 4− 1 = 3
− Some micro estimates of κ are this large� If κ = 0.05 then multiplier is only ≈ 0.05
− 2007-vintage DSGE models mostly implied κ ∈ (0.00,0.05)
![Page 13: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/13.jpg)
Why Do We Care About the MPC?
Nobody trying to make a forecast in 2009–2010 would ask:
� Big negative shocks to income� Idea: Respond with big ‘stimulus’ tax cuts� In simplest Keynesian liquidity trap model: If ccc = c̄cc + (yyy − τ)κ� ⇒ multiplier on ∆τ is 1/(1− κ)− 1
� If κ = 0.75 then multiplier is 4− 1 = 3
− Some micro estimates of κ are this large� If κ = 0.05 then multiplier is only ≈ 0.05
− 2007-vintage DSGE models mostly implied κ ∈ (0.00,0.05)
![Page 14: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/14.jpg)
Why Do We Care About the MPC?
Nobody trying to make a forecast in 2009–2010 would ask:
� Big negative shocks to income� Idea: Respond with big ‘stimulus’ tax cuts� In simplest Keynesian liquidity trap model: If ccc = c̄cc + (yyy − τ)κ� ⇒ multiplier on ∆τ is 1/(1− κ)− 1
� If κ = 0.75 then multiplier is 4− 1 = 3− Some micro estimates of κ are this large
� If κ = 0.05 then multiplier is only ≈ 0.05
− 2007-vintage DSGE models mostly implied κ ∈ (0.00,0.05)
![Page 15: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/15.jpg)
Why Do We Care About the MPC?
Nobody trying to make a forecast in 2009–2010 would ask:
� Big negative shocks to income� Idea: Respond with big ‘stimulus’ tax cuts� In simplest Keynesian liquidity trap model: If ccc = c̄cc + (yyy − τ)κ� ⇒ multiplier on ∆τ is 1/(1− κ)− 1
� If κ = 0.75 then multiplier is 4− 1 = 3− Some micro estimates of κ are this large
� If κ = 0.05 then multiplier is only ≈ 0.05
− 2007-vintage DSGE models mostly implied κ ∈ (0.00,0.05)
![Page 16: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/16.jpg)
Why Do We Care About the MPC?
Nobody trying to make a forecast in 2009–2010 would ask:
� Big negative shocks to income� Idea: Respond with big ‘stimulus’ tax cuts� In simplest Keynesian liquidity trap model: If ccc = c̄cc + (yyy − τ)κ� ⇒ multiplier on ∆τ is 1/(1− κ)− 1
� If κ = 0.75 then multiplier is 4− 1 = 3− Some micro estimates of κ are this large
� If κ = 0.05 then multiplier is only ≈ 0.05− 2007-vintage DSGE models mostly implied κ ∈ (0.00,0.05)
![Page 17: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/17.jpg)
What, If Anything, Is ‘the MPC’?
Friedman [1957]:
yyy t = pppt + Θt
ccct = pppt
� MPC out of permanent shocks is χ = 1
� MPC out of transitory shocks is κ = 0
⇒ in a regression like
∆ccct+1 = α∆yyy t+1,
we should find 0 < α < 1 depending on extent to which peopleperceive ∆yyy t+1 as transitory or permanent
![Page 18: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/18.jpg)
What, If Anything, Is ‘the MPC’?
Friedman [1957]:
yyy t = pppt + Θt
ccct = pppt
� MPC out of permanent shocks is χ = 1� MPC out of transitory shocks is κ = 0
⇒ in a regression like
∆ccct+1 = α∆yyy t+1,
we should find 0 < α < 1 depending on extent to which peopleperceive ∆yyy t+1 as transitory or permanent
![Page 19: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/19.jpg)
What, If Anything, Is ‘the MPC’?
Friedman [1957]:
yyy t = pppt + Θt
ccct = pppt
� MPC out of permanent shocks is χ = 1� MPC out of transitory shocks is κ = 0
⇒ in a regression like
∆ccct+1 = α∆yyy t+1,
we should find 0 < α < 1 depending on extent to which peopleperceive ∆yyy t+1 as transitory or permanent
![Page 20: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/20.jpg)
What, If Anything, Is ‘the MPC’?
Friedman [1957]:
yyy t = pppt + Θt
ccct = pppt
� MPC out of permanent shocks is χ = 1� MPC out of transitory shocks is κ = 0
⇒ in a regression like
∆ccct+1 = α∆yyy t+1,
we should find 0 < α < 1 depending on extent to which peopleperceive ∆yyy t+1 as transitory or permanent
![Page 21: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/21.jpg)
What, If Anything, Is ‘the MPC’?
Friedman [1957]:
yyy t = pppt + Θt
ccct = pppt
� MPC out of permanent shocks is χ = 1� MPC out of transitory shocks is κ = 0
⇒ in a regression like
∆ccct+1 = α∆yyy t+1,
we should find 0 < α < 1 depending on extent to which peopleperceive ∆yyy t+1 as transitory or permanent
![Page 22: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/22.jpg)
What, If Anything, Is ‘the MPC’?
Friedman [1957]:
yyy t = pppt + Θt
ccct = pppt
� MPC out of permanent shocks is χ = 1� MPC out of transitory shocks is κ = 0
⇒ in a regression like
∆ccct+1 = α∆yyy t+1,
we should find 0 < α < 1 depending on extent to which peopleperceive ∆yyy t+1 as transitory or permanent
![Page 23: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/23.jpg)
0 < α̂ < 1:
Not Exactly a Triumph
Problem:� Friedman’s PIH is not really about r
![Page 24: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/24.jpg)
0 < α̂ < 1:
Not Exactly a Triumph
Problem:� Friedman’s PIH is not really about r
![Page 25: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/25.jpg)
0 < α̂ < 1: Not Exactly a Triumph
Problem:� Friedman’s PIH is not really about r
![Page 26: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/26.jpg)
Standard Theory About Response to r ...
If u(ccc) = (1− γ)−1ccc1−γ, and r is believed to be constant forever, thenperfect foresight infinite horizon model PerfForesightCRRA says
ccc =
�
bbbt + ppp�
1 + r
r
��
︸ ︷︷ ︸
ooo
κ︷ ︸︸ ︷
�
r− γ−1(r− ϑ)�
= oooκ
where ooo is ‘overall wealth’ (human plus nonhuman), and oooκ is theamount that the model says is OK to spend (!)
![Page 27: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/27.jpg)
Standard Theory About Response to r ...
If u(ccc) = (1− γ)−1ccc1−γ, and r is believed to be constant forever, thenperfect foresight infinite horizon model PerfForesightCRRA says
ccc =
�
bbbt + ppp�
1 + r
r
��
︸ ︷︷ ︸
ooo
κ︷ ︸︸ ︷
�
r− γ−1(r− ϑ)�
= oooκ
where ooo is ‘overall wealth’ (human plus nonhuman), and oooκ is theamount that the model says is OK to spend (!)
![Page 28: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/28.jpg)
Unanticipated Permanent Change In r
ccct =�
r− γ−1(r− ϑ)��
bbbt + ppp�1+r
r
��
Three effects:� Income Effect (assume γ−1 = 0 and ppp = 0):
∆ccct+1 = ∆rt+1bbbt
� Substitution Effect (assume ppp = 0):
∆ccct+1 = γ−1∆rt+1bbbt
� Human Wealth Effect (ppp 6= 0, rt and rt+1 small)
∆ccct+1 ≈ (1/rt+1 − 1/rt )pppκt
= (rt /rt+1 − 1) (κt /rt )ppp
![Page 29: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/29.jpg)
Unanticipated Permanent Change In r
ccct =�
r− γ−1(r− ϑ)��
bbbt + ppp�1+r
r
��
Three effects:� Income Effect (assume γ−1 = 0 and ppp = 0):
∆ccct+1 = ∆rt+1bbbt
� Substitution Effect (assume ppp = 0):
∆ccct+1 = γ−1∆rt+1bbbt
� Human Wealth Effect (ppp 6= 0, rt and rt+1 small)
∆ccct+1 ≈ (1/rt+1 − 1/rt )pppκt
= (rt /rt+1 − 1) (κt /rt )ppp
![Page 30: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/30.jpg)
Unanticipated Permanent Change In r
ccct =�
r− γ−1(r− ϑ)��
bbbt + ppp�1+r
r
��
Three effects:� Income Effect (assume γ−1 = 0 and ppp = 0):
∆ccct+1 = ∆rt+1bbbt
� Substitution Effect (assume ppp = 0):
∆ccct+1 = γ−1∆rt+1bbbt
� Human Wealth Effect (ppp 6= 0, rt and rt+1 small)
∆ccct+1 ≈ (1/rt+1 − 1/rt )pppκt
= (rt /rt+1 − 1) (κt /rt )ppp
![Page 31: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/31.jpg)
Sizes? Depends ...
Simple calibration: bbbt = ppp = 1, rt = 0.06, rt+1 = ϑ = 0.03
Effect Sizeγ Income-And-Subst Human Wealth ∆ccct+1/∆yyy t+1∞ 0.03 1.0 1.03/0.03 ≈ 301 0 1.0 1.0/0.03 ≈ 30
So, now, one theory/calibration or another can accommodate any0 < α < 30.
Definitely not rejected!
![Page 32: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/32.jpg)
Sizes? Depends ...
Simple calibration: bbbt = ppp = 1, rt = 0.06, rt+1 = ϑ = 0.03
Effect Sizeγ Income-And-Subst Human Wealth ∆ccct+1/∆yyy t+1∞ 0.03 1.0 1.03/0.03 ≈ 301 0 1.0 1.0/0.03 ≈ 30
So, now, one theory/calibration or another can accommodate any0 < α < 30.
Definitely not rejected!
![Page 33: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/33.jpg)
The Point? ‘Heterogeneity’
Characteristics of borrowers: ARM borrowers in 2004-2006� Still in place in 2010-12
� Concentrated in a few ‘hot’ housing markets� Measured in 2010-12
We don’t know:
� How they differ in ϑ, γ, σ2ψ, σ2
θ, ...
� Assets, family size/structure, age, ..� Beliefs about future housing price growth (by locale?)� Beliefs about future own income growth� Beliefs about future path of interest rates (ARM and other)� Why did they pick an ARM; etc etc etc
Any of these differences could make huge difference for behavior
![Page 34: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/34.jpg)
The Point? ‘Heterogeneity’
Characteristics of borrowers: ARM borrowers in 2004-2006� Still in place in 2010-12� Concentrated in a few ‘hot’ housing markets
� Measured in 2010-12
We don’t know:
� How they differ in ϑ, γ, σ2ψ, σ2
θ, ...
� Assets, family size/structure, age, ..� Beliefs about future housing price growth (by locale?)� Beliefs about future own income growth� Beliefs about future path of interest rates (ARM and other)� Why did they pick an ARM; etc etc etc
Any of these differences could make huge difference for behavior
![Page 35: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/35.jpg)
The Point? ‘Heterogeneity’
Characteristics of borrowers: ARM borrowers in 2004-2006� Still in place in 2010-12� Concentrated in a few ‘hot’ housing markets� Measured in 2010-12
We don’t know:
� How they differ in ϑ, γ, σ2ψ, σ2
θ, ...
� Assets, family size/structure, age, ..� Beliefs about future housing price growth (by locale?)� Beliefs about future own income growth� Beliefs about future path of interest rates (ARM and other)� Why did they pick an ARM; etc etc etc
Any of these differences could make huge difference for behavior
![Page 36: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/36.jpg)
The Point? ‘Heterogeneity’
Characteristics of borrowers: ARM borrowers in 2004-2006� Still in place in 2010-12� Concentrated in a few ‘hot’ housing markets� Measured in 2010-12
We don’t know:
� How they differ in ϑ, γ, σ2ψ, σ2
θ, ...
� Assets, family size/structure, age, ..� Beliefs about future housing price growth (by locale?)� Beliefs about future own income growth� Beliefs about future path of interest rates (ARM and other)� Why did they pick an ARM; etc etc etc
Any of these differences could make huge difference for behavior
![Page 37: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/37.jpg)
The Point? ‘Heterogeneity’
Characteristics of borrowers: ARM borrowers in 2004-2006� Still in place in 2010-12� Concentrated in a few ‘hot’ housing markets� Measured in 2010-12
We don’t know:� How they differ in ϑ, γ, σ2
ψ, σ2
θ, ...
� Assets, family size/structure, age, ..� Beliefs about future housing price growth (by locale?)� Beliefs about future own income growth� Beliefs about future path of interest rates (ARM and other)� Why did they pick an ARM; etc etc etc
Any of these differences could make huge difference for behavior
![Page 38: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/38.jpg)
The Point? ‘Heterogeneity’
Characteristics of borrowers: ARM borrowers in 2004-2006� Still in place in 2010-12� Concentrated in a few ‘hot’ housing markets� Measured in 2010-12
We don’t know:� How they differ in ϑ, γ, σ2
ψ, σ2
θ, ...
� Assets, family size/structure, age, ..
� Beliefs about future housing price growth (by locale?)� Beliefs about future own income growth� Beliefs about future path of interest rates (ARM and other)� Why did they pick an ARM; etc etc etc
Any of these differences could make huge difference for behavior
![Page 39: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/39.jpg)
The Point? ‘Heterogeneity’
Characteristics of borrowers: ARM borrowers in 2004-2006� Still in place in 2010-12� Concentrated in a few ‘hot’ housing markets� Measured in 2010-12
We don’t know:� How they differ in ϑ, γ, σ2
ψ, σ2
θ, ...
� Assets, family size/structure, age, ..� Beliefs about future housing price growth (by locale?)
� Beliefs about future own income growth� Beliefs about future path of interest rates (ARM and other)� Why did they pick an ARM; etc etc etc
Any of these differences could make huge difference for behavior
![Page 40: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/40.jpg)
The Point? ‘Heterogeneity’
Characteristics of borrowers: ARM borrowers in 2004-2006� Still in place in 2010-12� Concentrated in a few ‘hot’ housing markets� Measured in 2010-12
We don’t know:� How they differ in ϑ, γ, σ2
ψ, σ2
θ, ...
� Assets, family size/structure, age, ..� Beliefs about future housing price growth (by locale?)� Beliefs about future own income growth
� Beliefs about future path of interest rates (ARM and other)� Why did they pick an ARM; etc etc etc
Any of these differences could make huge difference for behavior
![Page 41: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/41.jpg)
The Point? ‘Heterogeneity’
Characteristics of borrowers: ARM borrowers in 2004-2006� Still in place in 2010-12� Concentrated in a few ‘hot’ housing markets� Measured in 2010-12
We don’t know:� How they differ in ϑ, γ, σ2
ψ, σ2
θ, ...
� Assets, family size/structure, age, ..� Beliefs about future housing price growth (by locale?)� Beliefs about future own income growth� Beliefs about future path of interest rates (ARM and other)
� Why did they pick an ARM; etc etc etcAny of these differences could make huge difference for behavior
![Page 42: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/42.jpg)
The Point? ‘Heterogeneity’
Characteristics of borrowers: ARM borrowers in 2004-2006� Still in place in 2010-12� Concentrated in a few ‘hot’ housing markets� Measured in 2010-12
We don’t know:� How they differ in ϑ, γ, σ2
ψ, σ2
θ, ...
� Assets, family size/structure, age, ..� Beliefs about future housing price growth (by locale?)� Beliefs about future own income growth� Beliefs about future path of interest rates (ARM and other)� Why did they pick an ARM; etc etc etc
Any of these differences could make huge difference for behavior
![Page 43: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/43.jpg)
The Point? ‘Heterogeneity’
Characteristics of borrowers: ARM borrowers in 2004-2006� Still in place in 2010-12� Concentrated in a few ‘hot’ housing markets� Measured in 2010-12
We don’t know:� How they differ in ϑ, γ, σ2
ψ, σ2
θ, ...
� Assets, family size/structure, age, ..� Beliefs about future housing price growth (by locale?)� Beliefs about future own income growth� Beliefs about future path of interest rates (ARM and other)� Why did they pick an ARM; etc etc etc
Any of these differences could make huge difference for behavior
![Page 44: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/44.jpg)
The Point? ‘Heterogeneity’
Characteristics of borrowers: ARM borrowers in 2004-2006� Still in place in 2010-12� Concentrated in a few ‘hot’ housing markets� Measured in 2010-12
We don’t know:� How they differ in ϑ, γ, σ2
ψ, σ2
θ, ...
� Assets, family size/structure, age, ..� Beliefs about future housing price growth (by locale?)� Beliefs about future own income growth� Beliefs about future path of interest rates (ARM and other)� Why did they pick an ARM; etc etc etc
Any of these differences could make huge difference for behavior
![Page 45: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/45.jpg)
What Have We Learned ...� From Keyes et al:
� Difference in rate of car purchases, auto debt accumulation, andcredit card debt path due to interest rate reset timing differencesbetween 5/1 and 7/1 ARMs that expired in 2010-2012
� From DiMaggio et al:
� For people who got privately securitized 5/1 ARMs in 2004-2006,consequences of resets for mortgage prepayment, auto debt,credit card debt
If I could send a message to my 2009 self, what is most I could say?
� ∃ people for whom extra income from ARM resets in 2009-2010will lead to some ccc and some deleveraging
� Little progress has been made on ‘What will the MPC be out ofstimulus payments?’
![Page 46: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/46.jpg)
What Have We Learned ...� From Keyes et al:
� Difference in rate of car purchases, auto debt accumulation, andcredit card debt path due to interest rate reset timing differencesbetween 5/1 and 7/1 ARMs that expired in 2010-2012
� From DiMaggio et al:
� For people who got privately securitized 5/1 ARMs in 2004-2006,consequences of resets for mortgage prepayment, auto debt,credit card debt
If I could send a message to my 2009 self, what is most I could say?
� ∃ people for whom extra income from ARM resets in 2009-2010will lead to some ccc and some deleveraging
� Little progress has been made on ‘What will the MPC be out ofstimulus payments?’
![Page 47: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/47.jpg)
What Have We Learned ...� From Keyes et al:
� Difference in rate of car purchases, auto debt accumulation, andcredit card debt path due to interest rate reset timing differencesbetween 5/1 and 7/1 ARMs that expired in 2010-2012
� From DiMaggio et al:
� For people who got privately securitized 5/1 ARMs in 2004-2006,consequences of resets for mortgage prepayment, auto debt,credit card debt
If I could send a message to my 2009 self, what is most I could say?
� ∃ people for whom extra income from ARM resets in 2009-2010will lead to some ccc and some deleveraging
� Little progress has been made on ‘What will the MPC be out ofstimulus payments?’
![Page 48: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/48.jpg)
What Have We Learned ...� From Keyes et al:
� Difference in rate of car purchases, auto debt accumulation, andcredit card debt path due to interest rate reset timing differencesbetween 5/1 and 7/1 ARMs that expired in 2010-2012
� From DiMaggio et al:� For people who got privately securitized 5/1 ARMs in 2004-2006,
consequences of resets for mortgage prepayment, auto debt,credit card debt
If I could send a message to my 2009 self, what is most I could say?
� ∃ people for whom extra income from ARM resets in 2009-2010will lead to some ccc and some deleveraging
� Little progress has been made on ‘What will the MPC be out ofstimulus payments?’
![Page 49: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/49.jpg)
What Have We Learned ...� From Keyes et al:
� Difference in rate of car purchases, auto debt accumulation, andcredit card debt path due to interest rate reset timing differencesbetween 5/1 and 7/1 ARMs that expired in 2010-2012
� From DiMaggio et al:� For people who got privately securitized 5/1 ARMs in 2004-2006,
consequences of resets for mortgage prepayment, auto debt,credit card debt
If I could send a message to my 2009 self, what is most I could say?
� ∃ people for whom extra income from ARM resets in 2009-2010will lead to some ccc and some deleveraging
� Little progress has been made on ‘What will the MPC be out ofstimulus payments?’
![Page 50: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/50.jpg)
What Have We Learned ...� From Keyes et al:
� Difference in rate of car purchases, auto debt accumulation, andcredit card debt path due to interest rate reset timing differencesbetween 5/1 and 7/1 ARMs that expired in 2010-2012
� From DiMaggio et al:� For people who got privately securitized 5/1 ARMs in 2004-2006,
consequences of resets for mortgage prepayment, auto debt,credit card debt
If I could send a message to my 2009 self, what is most I could say?
� ∃ people for whom extra income from ARM resets in 2009-2010will lead to some ccc and some deleveraging
� Little progress has been made on ‘What will the MPC be out ofstimulus payments?’
![Page 51: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/51.jpg)
What Have We Learned ...� From Keyes et al:
� Difference in rate of car purchases, auto debt accumulation, andcredit card debt path due to interest rate reset timing differencesbetween 5/1 and 7/1 ARMs that expired in 2010-2012
� From DiMaggio et al:� For people who got privately securitized 5/1 ARMs in 2004-2006,
consequences of resets for mortgage prepayment, auto debt,credit card debt
If I could send a message to my 2009 self, what is most I could say?
� ∃ people for whom extra income from ARM resets in 2009-2010will lead to some ccc and some deleveraging
� Little progress has been made on ‘What will the MPC be out ofstimulus payments?’
![Page 52: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/52.jpg)
What Have We Learned ...� From Keyes et al:
� Difference in rate of car purchases, auto debt accumulation, andcredit card debt path due to interest rate reset timing differencesbetween 5/1 and 7/1 ARMs that expired in 2010-2012
� From DiMaggio et al:� For people who got privately securitized 5/1 ARMs in 2004-2006,
consequences of resets for mortgage prepayment, auto debt,credit card debt
If I could send a message to my 2009 self, what is most I could say?
� ∃ people for whom extra income from ARM resets in 2009-2010will lead to some ccc and some deleveraging
� Little progress has been made on ‘What will the MPC be out ofstimulus payments?’
![Page 53: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/53.jpg)
Looking Under Lamppost With Laser Beam
Two views:� LATE/Natural Experiment/Micro Crowd:
� That’s all we can do.� Me: No! Use data and results to calibrate a theory
� IF data line up reasonably with theory, maybe we learnedsomething
![Page 54: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/54.jpg)
Looking Under Lamppost With Laser Beam
Two views:� LATE/Natural Experiment/Micro Crowd:
� That’s all we can do.
� Me: No! Use data and results to calibrate a theory
� IF data line up reasonably with theory, maybe we learnedsomething
![Page 55: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/55.jpg)
Looking Under Lamppost With Laser Beam
Two views:� LATE/Natural Experiment/Micro Crowd:
� That’s all we can do.� Me: No! Use data and results to calibrate a theory
� IF data line up reasonably with theory, maybe we learnedsomething
![Page 56: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/56.jpg)
Looking Under Lamppost With Laser Beam
Two views:� LATE/Natural Experiment/Micro Crowd:
� That’s all we can do.� Me: No! Use data and results to calibrate a theory
� IF data line up reasonably with theory, maybe we learnedsomething
![Page 57: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/57.jpg)
Theory Is Your Friend!
Three kinds of ‘heterogeneity’:
� Within person over time:
� Shift in state variable
− e.g., wealth shock (due, say, to house prices)
� Change in beliefs
− e.g., a rise in uncertainty
� Differences Across People
� e.g., time preference?� Implicit assumption: Dummies control for these� Problems:
− We don’t WANT to control for this, we want to measure it!− Dummies maybe control for levels but not patterns of behavior
![Page 58: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/58.jpg)
Theory Is Your Friend!
Three kinds of ‘heterogeneity’:� Within person over time:
� Shift in state variable
− e.g., wealth shock (due, say, to house prices)
� Change in beliefs
− e.g., a rise in uncertainty
� Differences Across People
� e.g., time preference?� Implicit assumption: Dummies control for these� Problems:
− We don’t WANT to control for this, we want to measure it!− Dummies maybe control for levels but not patterns of behavior
![Page 59: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/59.jpg)
Theory Is Your Friend!
Three kinds of ‘heterogeneity’:� Within person over time:
� Shift in state variable
− e.g., wealth shock (due, say, to house prices)� Change in beliefs
− e.g., a rise in uncertainty
� Differences Across People
� e.g., time preference?� Implicit assumption: Dummies control for these� Problems:
− We don’t WANT to control for this, we want to measure it!− Dummies maybe control for levels but not patterns of behavior
![Page 60: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/60.jpg)
Theory Is Your Friend!
Three kinds of ‘heterogeneity’:� Within person over time:
� Shift in state variable− e.g., wealth shock (due, say, to house prices)
� Change in beliefs
− e.g., a rise in uncertainty
� Differences Across People
� e.g., time preference?� Implicit assumption: Dummies control for these� Problems:
− We don’t WANT to control for this, we want to measure it!− Dummies maybe control for levels but not patterns of behavior
![Page 61: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/61.jpg)
Theory Is Your Friend!
Three kinds of ‘heterogeneity’:� Within person over time:
� Shift in state variable− e.g., wealth shock (due, say, to house prices)
� Change in beliefs
− e.g., a rise in uncertainty� Differences Across People
� e.g., time preference?� Implicit assumption: Dummies control for these� Problems:
− We don’t WANT to control for this, we want to measure it!− Dummies maybe control for levels but not patterns of behavior
![Page 62: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/62.jpg)
Theory Is Your Friend!
Three kinds of ‘heterogeneity’:� Within person over time:
� Shift in state variable− e.g., wealth shock (due, say, to house prices)
� Change in beliefs− e.g., a rise in uncertainty
� Differences Across People
� e.g., time preference?� Implicit assumption: Dummies control for these� Problems:
− We don’t WANT to control for this, we want to measure it!− Dummies maybe control for levels but not patterns of behavior
![Page 63: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/63.jpg)
Theory Is Your Friend!
Three kinds of ‘heterogeneity’:� Within person over time:
� Shift in state variable− e.g., wealth shock (due, say, to house prices)
� Change in beliefs− e.g., a rise in uncertainty
� Differences Across People
� e.g., time preference?� Implicit assumption: Dummies control for these� Problems:
− We don’t WANT to control for this, we want to measure it!− Dummies maybe control for levels but not patterns of behavior
![Page 64: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/64.jpg)
Theory Is Your Friend!
Three kinds of ‘heterogeneity’:� Within person over time:
� Shift in state variable− e.g., wealth shock (due, say, to house prices)
� Change in beliefs− e.g., a rise in uncertainty
� Differences Across People� e.g., time preference?
� Implicit assumption: Dummies control for these� Problems:
− We don’t WANT to control for this, we want to measure it!− Dummies maybe control for levels but not patterns of behavior
![Page 65: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/65.jpg)
Theory Is Your Friend!
Three kinds of ‘heterogeneity’:� Within person over time:
� Shift in state variable− e.g., wealth shock (due, say, to house prices)
� Change in beliefs− e.g., a rise in uncertainty
� Differences Across People� e.g., time preference?� Implicit assumption: Dummies control for these
� Problems:
− We don’t WANT to control for this, we want to measure it!− Dummies maybe control for levels but not patterns of behavior
![Page 66: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/66.jpg)
Theory Is Your Friend!
Three kinds of ‘heterogeneity’:� Within person over time:
� Shift in state variable− e.g., wealth shock (due, say, to house prices)
� Change in beliefs− e.g., a rise in uncertainty
� Differences Across People� e.g., time preference?� Implicit assumption: Dummies control for these� Problems:
− We don’t WANT to control for this, we want to measure it!− Dummies maybe control for levels but not patterns of behavior
![Page 67: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/67.jpg)
Theory Is Your Friend!
Three kinds of ‘heterogeneity’:� Within person over time:
� Shift in state variable− e.g., wealth shock (due, say, to house prices)
� Change in beliefs− e.g., a rise in uncertainty
� Differences Across People� e.g., time preference?� Implicit assumption: Dummies control for these� Problems:
− We don’t WANT to control for this, we want to measure it!
− Dummies maybe control for levels but not patterns of behavior
![Page 68: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/68.jpg)
Theory Is Your Friend!
Three kinds of ‘heterogeneity’:� Within person over time:
� Shift in state variable− e.g., wealth shock (due, say, to house prices)
� Change in beliefs− e.g., a rise in uncertainty
� Differences Across People� e.g., time preference?� Implicit assumption: Dummies control for these� Problems:
− We don’t WANT to control for this, we want to measure it!− Dummies maybe control for levels but not patterns of behavior
![Page 69: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/69.jpg)
Example Of Puzzle That Isn’t
At a couple of places, some confusion about apparent contradiction:
� Low wealth borrowers have a higher MPC
� Low wealth borrowers deleverage more
![Page 70: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/70.jpg)
Example Of Puzzle That Isn’t
At a couple of places, some confusion about apparent contradiction:
� Low wealth borrowers have a higher MPC� Low wealth borrowers deleverage more
![Page 71: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/71.jpg)
A Wealth Shock
Dmt+1e = 0 �
cHmL�
ct � � ct+1
Wealth Shock
� Target
cHmL�
mÇ
mt
m
cÇ
c
![Page 72: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/72.jpg)
Another Puzzle That Isn’t� Sometimes low wealth borrowers deleverage more
� Sometimes low wealth borrowers deleverage less
![Page 73: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/73.jpg)
Another Puzzle That Isn’t� Sometimes low wealth borrowers deleverage more� Sometimes low wealth borrowers deleverage less
![Page 74: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/74.jpg)
Differences Across Households In Time Preference
Orig Target ↘New Target↘
Orig c() ⟶
⟵ New c()
![Page 75: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/75.jpg)
More Exciting Part: Local Keynesian Effects!� Counties with lots of ARMs: Notable shock to income
� Esp for Keyes et al
� Keyes et al do find substantial effects on restaurants, other NT� DiMaggio et al, smaller� cf. also related paper by Mondragon
This DOES reject a theory: RBC at local level
![Page 76: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/76.jpg)
More Exciting Part: Local Keynesian Effects!� Counties with lots of ARMs: Notable shock to income
� Esp for Keyes et al
� Keyes et al do find substantial effects on restaurants, other NT� DiMaggio et al, smaller� cf. also related paper by Mondragon
This DOES reject a theory: RBC at local level
![Page 77: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/77.jpg)
More Exciting Part: Local Keynesian Effects!� Counties with lots of ARMs: Notable shock to income
� Esp for Keyes et al
� Keyes et al do find substantial effects on restaurants, other NT
� DiMaggio et al, smaller� cf. also related paper by Mondragon
This DOES reject a theory: RBC at local level
![Page 78: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/78.jpg)
More Exciting Part: Local Keynesian Effects!� Counties with lots of ARMs: Notable shock to income
� Esp for Keyes et al
� Keyes et al do find substantial effects on restaurants, other NT� DiMaggio et al, smaller
� cf. also related paper by Mondragon
This DOES reject a theory: RBC at local level
![Page 79: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/79.jpg)
More Exciting Part: Local Keynesian Effects!� Counties with lots of ARMs: Notable shock to income
� Esp for Keyes et al
� Keyes et al do find substantial effects on restaurants, other NT� DiMaggio et al, smaller� cf. also related paper by Mondragon
This DOES reject a theory: RBC at local level
![Page 80: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/80.jpg)
More Exciting Part: Local Keynesian Effects!� Counties with lots of ARMs: Notable shock to income
� Esp for Keyes et al
� Keyes et al do find substantial effects on restaurants, other NT� DiMaggio et al, smaller� cf. also related paper by Mondragon
This DOES reject a theory: RBC at local level
![Page 81: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/81.jpg)
More Exciting Part: Local Keynesian Effects!� Counties with lots of ARMs: Notable shock to income
� Esp for Keyes et al
� Keyes et al do find substantial effects on restaurants, other NT� DiMaggio et al, smaller� cf. also related paper by Mondragon
This DOES reject a theory: RBC at local level
![Page 82: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/82.jpg)
Conclusion� Authors have discovered a nearly perfect natural experiment
� Without some theory, not clear whether results are a surprise� ⇒ Use for calibrating theories
![Page 83: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/83.jpg)
Conclusion� Authors have discovered a nearly perfect natural experiment� Without some theory, not clear whether results are a surprise
� ⇒ Use for calibrating theories
![Page 84: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/84.jpg)
Conclusion� Authors have discovered a nearly perfect natural experiment� Without some theory, not clear whether results are a surprise� ⇒ Use for calibrating theories
![Page 85: Two Papers About the MPC! · Why Do We Care About the MPC? Nobody trying to make a forecast in 2009–2010 would ask: — Big negative shocks to income — Idea: Respond with big](https://reader033.fdocuments.in/reader033/viewer/2022060602/60563da9e495627e04798065/html5/thumbnails/85.jpg)
Milton A. Friedman. A Theory of the Consumption Function.Princeton University Press, 1957.