Working Paper

How Small is Small? Non-linearities in Heterogeneous Agent Models

Abstract: In plausibly calibrated heterogeneous-agent models, marginal propensities to consume (MPCs) are highly non-linear in wealth, falling sharply away from borrowing constraints. As a result, the aggregate consumption response to a fiscal transfer is strongly concave in its size: larger transfers shift households out of high-MPC regions, dampening the consumption response. Across partial- and general-equilibrium settings, linear methods substantially overstate the effects of fiscal stimulus at empirically relevant sizes. Local methods of any order are unlikely to be reliable in settings where a failure of Ricardian equivalence from high MPCs is important.

JEL Classification: D15; D31; D52; E21; E62; G51; C63;

https://doi.org/10.21034/wp.815

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Working Papers

Publication Date: 2026-06-22

Number: 815