No. 1034 - An assessment of the marginal propensity to consume in Italy in the post-Covid recovery
Disposable income in Italy was supported by a sustained increase in employment after the pandemic, while household consumption recorded weaker growth, resulting in a decline in the aggregate marginal propensity to consume (MPC). This pattern may reflect changes in households' spending behaviour, as well as employment and demographic dynamics that shifted income towards households with lower MPCs. This paper quantifies the relative contribution of these two channels.
Between 2016 and 2022, the MPC declined across all household groups, reflecting greater caution in spending decisions amid heightened economic uncertainty. This accounts for around two thirds of the overall decline in the aggregate MPC. Slightly more than one third of the reduction is instead explained by a composition effect, driven by the growing share - both in terms of population and aggregate income - of households with lower MPCs, particularly those with more than one labour income earner and those with older or more highly educated household members.
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