Estimating marginal propensity to consume for income groups on the basis of relative permanent income hypothesis in Iran

Marginal propensity to consume (MPC) in income groups has a great importance in macroeconomic policy making. But due to some restrictions, such as lack of direct data for income and consumption groups in Iran's statistical yearbooks, estimation of MPC for income groups has not been done yet. The purpose of this study is to estimate the MPC for income groups by using the relative permanent income hypothesis (RPI), introduced in recent economic literature. Also in this research, the effects of income distribution on MPC of income groups will be analyzed. To this end, ordinary least square (OLS) method is used during 1982-2006 period. Study results confirm a significant relationship between MPC and RPI. According to estimates, MPC for low, medium and high income groups is 0/995, 0/84 and 0/7, respectively. Short run estimate of MPC shows that with increase of MPC for one income group, the MPC for another income group will decline. Among other result in this study is that in Iran economy, unfair (fair) distribution of income, will not decrease (increase) consumption enough to increase (decrease) saving to optimal level.