The debate over inequality relies mostly on income data but consumption is a direct measure of well-being and a good indicator of inequality notably because it reflects long-term prospects, said Professor Tullio Jappelli of the University of Naples Federico II at a seminar organised jointly by the EIB Institute and the University of Luxembourg as part of the “Inequality and…?” series.
Income inequality tends to take precedence over consumption inequality but consumption inequality is lower and more stable, he added. Income shocks can lead to the spread of consumption inequality, and their impact is measured by the marginal propensity to consume (MPC). This is larger for low income people, and is a key tool for predicting households’ responses to redistributive fiscal policies and monetary policy, Professor Jappelli continued.
However, there is not one single MPC and it varies according to many factors (institutions, characteristics of credit and insurance markets, habits, nature of income shocks…). This heterogeneity has important implications for the effectiveness of fiscal policy, he concluded.
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