Asymptotic Marginal Propensity to Consume

Document pages: 32 pages

Abstract: We prove that the consumption functions in income fluctuation problems areasymptotically linear if the marginal utility is regularly varying. We alsoanalytically characterize the asymptotic marginal propensities to consume(MPCs) out of wealth and derive necessary and sufficient conditions under whichthey are 0, 1, or are somewhere in between. When the return process withtime-varying volatility is calibrated from data, the asymptotic MPCs can bezero with moderate risk aversion. Our results potentially explain why thesaving rates among the rich are positive and increasing in wealth.