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Precautionary Saving, Borrowing Constraints, and Fiscal Policy

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  • Cheolbeom Park
  • Thomas Bishop

Abstract

Recent empirical studies suggest that the average marginal propensity to consume (MPC) has declined. This paper explains the declining trend of the MPC with a standard representative consumer model where borrowing constraints become more relaxed as suggested by data. With an increase in available credit, the consumer can easily spread out negative income shocks by credit card borrowing or consumer loans. As a result, consumers under relaxed borrowing constraints have lower MPCs than they had a generation ago. This result suggests that policy makers should now account for the less responsiveness of consumers to fiscal stimulus plans aiming at boosting consumpti

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 706.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:706

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Keywords: Marginal Propensity to Consume; Borrowing Constraints; Precautionary Saving; Consumption Function; Effectiveness of Fiscal Policy;

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References

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  1. David B. Gross & Nicholas S. Souleles, 2001. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," NBER Working Papers 8314, National Bureau of Economic Research, Inc.
  2. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, With and Without Liquidity Constraints (Expanded Version)," NBER Working Papers 8387, National Bureau of Economic Research, Inc.
  3. Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 1-55, February.
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  8. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc.
  9. Matthew D. Shapiro & Joel Slemrod, 2001. "Consumer Response to Tax Rebates," NBER Working Papers 8672, National Bureau of Economic Research, Inc.
  10. Sydney Ludvigson, 1996. "Consumption and credit: a model of time-varying liquidity constraints," Research Paper 9624, Federal Reserve Bank of New York.
  11. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
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  13. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  14. David Laibson & Andrea Repetto & Jeremy Tobacman, 2000. "A Debt Puzzle," NBER Working Papers 7879, National Bureau of Economic Research, Inc.
  15. Shapiro, Matthew D & Slemrod, Joel, 1995. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," American Economic Review, American Economic Association, vol. 85(1), pages 274-83, March.
  16. Sydney C. Ludvigson & Alexander Michaelides, 2001. "Does Buffer-Stock Saving Explain the Smoothness and Excess Sensitivity of Consumption?," American Economic Review, American Economic Association, vol. 91(3), pages 631-647, June.
  17. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
  18. Souleles, Nicholas S., 2002. "Consumer response to the Reagan tax cuts," Journal of Public Economics, Elsevier, vol. 85(1), pages 99-120, July.
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Cited by:
  1. Carlos Arriaga & Luis Miranda, 2009. "Risk and Efficiency in Credit Concession: A Case Study in Portugal," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 7(3), pages 307-326.

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