Liquidity Constraints of the Middle Class
- (pp. 130-55)
Abstract
Existing evidence from US 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.Citation
Campbell, Jeffrey R., and Zvi Hercowitz. 2019. "Liquidity Constraints of the Middle Class." American Economic Journal: Economic Policy, 11 (3): 130-55. DOI: 10.1257/pol.20180070Additional Materials
JEL Classification
- D14 Household Saving; Personal Finance
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- D31 Personal Income, Wealth, and Their Distributions
- E21 Macroeconomics: Consumption; Saving; Wealth
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- H31 Fiscal Policies and Behavior of Economic Agents: Household
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