RDP 2009-07: Estimating Marginal Propensities to Consume in Australia Using Micro Data 8. Conclusion

Using household level data this paper finds a range of estimates for the marginal propensity to consume out of lump-sum transfers and income tax cuts on non-durables in Australia. Although the results need to be interpreted with a degree of caution, consistent with the permanent income hypothesis the estimates of the marginal propensity to consume out of the Baby Bonus, which is temporary, are generally lower than the estimates of the marginal propensity to consume out of income tax cuts, which are likely to have been perceived as more persistent. Also, the paper finds some tentative evidence that there is heterogeneity in households' responses, for both temporary and persistent income shocks. Lower income households tend to consume a greater share of extra income, consistent with the idea that these households are more likely to be liquidity constrained, while households that perceive that they are at greater risk of losing their jobs tend to consume less out of lump-sum transfers and income tax cuts.