Tuesday, January 7, 2014

Household Responses To Changes In Income

This is technical, but very useful for those of us having to analyse the Malaysian economy (abstract):

The Marginal Propensity to Consume across Household Income Groups
Dhruva Murugasu, Ang Jian Wei, Tng Boon Hwa

Understanding heterogeneity in the way households respond to income changes is crucial for policymaking, as shocks in the economy often affect specific groups of households differently. Using data from the Household Expenditure Survey (HES), this paper estimates the marginal propensity to consume (MPC) out of disposable income for Malaysian households and examines how the propensities differ across income brackets. We find evidence that the MPC out of disposable income for lower income households is higher than that for higher income households. The MPCs vary from 0.81 for those earning below RM1,000 to 0.25 for those earning above RM10,000. These MPCs allow policymakers in Malaysia to estimate more precisely the aggregate consumption effects of income shocks that affect households of specific income groups.

For those not familiar with the terminology, the MPC is basically a ratio of how much is spent from an extra Ringgit of income. For instance, as quoted above, 81% of an additional Ringgit of income is spent for households earning below RM1,000 (full results are available on page 11). Note that this is the marginal propensity to consume, not the average, which would be considerably higher.

In any case, props to BNM for publishing, and can we have more papers like this please?

Technical Notes:

Dhruva Murugasu, Ang Jian Wei, Tng Boon Hwa, "The Marginal Propensity to Consume across Household Income Groups", Bank Negara Malaysia Working Paper Series WP2/2013, December 2013 (warning: pdf link)


  1. A nice paper and it's nice to have the numbers, but... we already know the qualitative aspects right?

    1. Yeah, but now we can all quote an "official" source when figuring out the effect of policy changes - which I think is the whole point of the paper.

  2. Dear Hisham,

    There is a blogger that wrongly quoted your blog entry on Government Securitisation. I attached the link for your reference.




    1. @anon 5.34

      Thanks for the heads-up! I'll look into it

  3. Yup..i too was amazed how a well know blogger could get it wrong.
    I wonder if i should correct him. but figure that the owner of this blog be given the honour.

  4. hmm.. how do i interpret this data?

    households earning RM1k is 81% more likely to spend extra income?

    pardon my ignorance

    1. @anon

      For every extra Ringgit earned, 81 sen is spent while 19 sen is saved.

    2. hmm does this mean cash hand out like BR1M don't lead to much savings? as majority gets spent?

    3. @anon 9.27

      Correct. That's why cash transfer are a good tool for fiscal stimulus, unlike tax cuts.

    4. I see. got it. tq for the clarification. Very much appreciated.

      But my concern with BR1M, as much I support it over blanket assistance, is when low income group use it for luxury purchases (eg new handphones), instead of spreading the usage on necessities for the whole year. I guess the report suggest that's what happen.

    5. @anon

      We (and many others) have suggested to EPU that BR1M should not be given to the head of the household (unless female), but their wives. Empirically, women tend to spend on their families, men spend on themselves.

    6. ah very interesting. same spending behaviours with my own parenst.

      tho the patriarch nature of our society (ie husband is the breadwinner that gives spending money to the housewife) and wifes not having bank accounts (to receive the direct fund transfer) may be a problem.

    7. @anon 10.27

      Yes, that's why the government thinks this might be too difficult to implement.

      There's plenty of precedent for giving social assistance money to women though - microcredit around the world is almost exclusively given to women, because the default rates are lower and because its more effective in breaking the cycle of poverty. Women invest in the future of their families (health and education), which allows the kids to break into formal labour markets, earning higher wages.

      It's not quite the same thing here, but the principle is the same. If you want responsible spending, give it to the ladies.