Reported MPC in the presence of debt

Abstract

We use information from the last wave of the Spanish Survey of Household Finances to study the influence of debt on self-reported marginal propensity to consume (MPC). We find an average MPC of 43% with indebted households having a smaller MPC than non-indebted households. This negative association increases along with the amount of debt. The MPC is lower for households that were subject to liquidity constraints in the previous year, and for those whose reference person is self-employed. The past relationship between income and consumption is also an important determinant of the MPC, as households that invest last year's savings, or hold them for the future, have a lower MPC. These findings are in line with the predictions of precautionary saving models.