Staff Working Paper No. 965
By Bruno Albuquerque and Georgina GreenWe study how household concerns about their future financial situation may affect the marginal propensity to consume (MPC) during the Covid-19 pandemic. We use a representative survey of UK households to compute the MPC from a hypothetical transfer of £500. We find that household expectations play a key role in determining differences in MPCs across households: households concerned about not being able to make ends meet have a 20% higher MPC than other households. This novel result holds when controlling for a range of important household-specific characteristics, including liquidity constraints. Our findings suggest that policies targeted to vulnerable and financially distressed households may prove more effective in stimulating demand than providing stimulus payments to all households.