Analysis of the Consumption Effect of Government's Transfer Through the Estimation of Marginal Propensity to Consume

Abstract

This study presents the mechanism of how consumption is generated by the government transfer to households. The nominal income multiplier of the social account matrix was obtained that took into account both production activities and household sectors. Also, the marginal propensity to consume for each income class was estimated using Korean household survey data. Through a scenario approach, the effect of income generated according to the distribution method of government transfer to household consumption was analyzed. First, the consumption effect of the same method as the first COVID-19 relief stimulus checks for all Korean households was estimated at 19.2% of the government transfer. Second, households' average propensity and marginal propensity to consume were estimated to be larger for the lower income class; and the rational government transfer to improve the distribution of household income is to strengthen support for the low-income class associated with higher marginal propensity to consume. Third, it is estimated that financial assets act as a wealth effect on consumption, and household debt plays a role in promoting consumption through financing rather than a limiting factor for current consumption. The significant contribution of the present research can be found in that it presents a methodology analyzing consumption effect while overcoming the limitations of the input-output analysis that assumes the omission of the household sector and helicopter-style government expenditure.