Understanding the heterogeneity in marginal propensity to consume across Maltese households

Abstract

This study seeks to gain an understanding of the factors driving the wide heterogeneity in Marginal Propensity to Consume (MPC) across Maltese Households. In doing so, it exploits a novel question within the third wave of the Household Finance and Consumption Survey; an ECB-coordinated survey carried out by the Central Bank of Malta in 2017. Respondents were asked what percentage they would intend to spend out of a one-time hypothetical windfall gain. A wide distribution was reported, with most responses clustered at spending nothing, spending half, or spending the entire amount of gain. Using a simple OLS model, the MPC is regressed on multiple demographics, household balance sheet characteristics and unobservable elements. On average, the MPC seems to be rising with age and falling with higher levels of educational attainment. Particularly, a strong positive relationship is found with the three older age-groups (55-64, 65-74 and 75+) and a negative association with university education. Quite interestingly, other relationships emerge for particular subsamples. Wealth is found to be negatively associated with MPC for the working age population, as well as for those reporting lower-than-normal yearly income. MPC among the latter also increases with credit constraints and self-employment. Furthermore, when controlling for more reliable self-reported income values, the negative relationship of MPC with income becomes statistically significant. The findings of this dissertation elicit important policy implications, which might serve to prompt further research in the understanding of micro-level heterogeneity for the design of more effective macroeconomic policy.