Liquidity Constraints of the Middle Class (revision of CentER DP 2015-009)

J.R. Campbell, Zvi Hercowitz

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Abstract

Existing evidence from U.S. middle-class households shows that their MPCs out of tax rebates greatly exceed the PIH's prediction and are weakly related to their liquid assets. The standard precautionary-saving model predicts the first fact but counterfactually requires MPCs to decrease with liquid wealth. Evidence from the Survey of Consumer Finances indicates widespread saving in anticipation of major expenditures like home purchases and college education. Adding such savings to the standard precautionary-saving model allows it to generate realistic MPCs for households with liquid wealth: The approaching expenditure simultaneously motivates asset accumulation and raises MPCs by shortening the effective planning horizon.
Original languageEnglish
Place of PublicationTilburg
PublisherDepartment of Econometrics
Number of pages36
Volume2018-039
Publication statusPublished - 17 Sep 2018

Publication series

NameCentER Discussion Paper
Volume2018-039

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Keywords

  • fiscal policy
  • tax rebates
  • marginal propensity to consume
  • term saving
  • precautionary saving

Cite this

Campbell, J. R., & Hercowitz, Z. (2018). Liquidity Constraints of the Middle Class (revision of CentER DP 2015-009). (CentER Discussion Paper; Vol. 2018-039). Tilburg: Department of Econometrics.