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Liquidity constraints of the middle class

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  • Jeffrey R. Campbell
  • Zvi Hercowitz

Abstract

There is evidence that a household's consumption response to transitory income does not decline, and perhaps increases, with the level of financial assets it holds. That is, middle class households with assets act as if they face liquidity constraints. This paper addresses this puzzling observation with a model of impatient households that face a large recurring expenditure. In spite of impatience, they save as this expenditure draws near. The authors call such saving made in preparation for a foreseeable event at a given future date "term saving." Term saving reverses the role of assets in the presence of liquidity constraints.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-09-20.

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Date of creation: 2009
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Handle: RePEc:fip:fedhwp:wp-09-20

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  1. Costas Meghir & Luigi Pistaferri, 2004. "Income Variance Dynamics and Heterogeneity," Econometrica, Econometric Society, vol. 72(1), pages 1-32, 01.
  2. Matthew D. Shapiro & Joel Slemrod, 2003. "Consumer Response to Tax Rebates," American Economic Review, American Economic Association, vol. 93(1), pages 381-396, March.
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Cited by:
  1. Kaplan, Greg & Violante, Giovanni L, 2011. "A Model of the Consumption Response to Fiscal Stimulus Payments," CEPR Discussion Papers 8562, C.E.P.R. Discussion Papers.
  2. Jeffrey R. Campbell & Zvi Hercowitz, 2011. "The financial labor supply accelerator," Working Paper Series WP-2011-05, Federal Reserve Bank of Chicago.

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