We study consumption and saving behaviour by education group in Iceland over the years 2005-2019, a turbulent period with dramatic fluctuations in factor incomes before, during and after the collapse of the country’s banking system. Using microdata containing the tax returns of all Icelandic taxpayers, we find that higher education lowers the marginal propensity to consume (MPC) by raising disposable income and relaxing liquidity constraints. Our results have implications for economic policy. For example, with a lower MPC following an increase in the average level of education, the multiplier is also lower, thus reducing the effectiveness of discretionary fiscal policy. However, since a lower multiplier strengthens the built-in stabilizing impact on the economy, macroeconomic volatility is reduced. Finally, in addition to using more conventional redistributive devices, countries struggling with unequal distributions of wealth and income could improve their situation by raising the level of education.
|SUERF – The European Money and Finance Forum
|Udgivet - 2023
|SUERF Policy Brief
- Macroeconomic stability