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Precautionary Saving and the Marginal Propensity to Consume

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  • Miles S. Kimball

Abstract

The marginal propensity to consume out of wealth is important for evaluating the effects of taxation on consumption, assessing the possibility of multiple equilibria due to aggregate demand spillovers, and explaining observed variations in consumption. It is also a component of the interest elasticity of consumption and the risk aversion of the value function which gives the expected present value of utility as a function of wealth. This paper analyzes the effect of uncertainty on the marginal propensity to consume within the context of the Permanent Income Hypothesis. Given plausible conditions on the utility function, income risk is found to raise the marginal propensity to consume out of wealth in a multiperiod model with many risky securities. The marginal investment portfolio for additions to wealth is also characterized.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3403.

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Date of creation: Jul 1990
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Publication status: published as With N. Gregory Mankiw, published as "Precautionary Saving and the Timingof Taxes", JPE, Vol. 97, no. 4 (1989): 863-879.
Handle: RePEc:nbr:nberwo:3403

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  1. DREZE, Jacques H. & MODIGLIANI, Franco, . "Cosumption decisions under uncertainty," CORE Discussion Papers RP -119, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Barsky, Robert B & Mankiw, N Gregory & Zeldes, Stephen P, 1986. "Ricardian Consumers with Keynesian Propensities," American Economic Review, American Economic Association, vol. 76(4), pages 676-91, September.
  3. Robert E. Hall & Frederic S. Mishkin, 1980. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
  4. Sanford J. Grossman & Angelo Melino & Robert J. Shiller, 1985. "Estimating the Continuous Time Consumption Based Asset Pricing Model," NBER Working Papers 1643, National Bureau of Economic Research, Inc.
  5. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  6. Sanford J. Grossman & Robert J. Shiller, 1980. "The Determinants of the Variability of Stock Market Prices," NBER Working Papers 0564, National Bureau of Economic Research, Inc.
  7. Douglas W. Elmendorf & Miles S. Kimball, 1991. "Taxation of Labor Income and the Demand For Risky Assets," NBER Working Papers 3904, National Bureau of Economic Research, Inc.
  8. Cantor, Richard, 1985. "The consumption function and the precautionary demand for savings," Economics Letters, Elsevier, vol. 17(3), pages 207-210.
  9. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  10. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  11. Mankiw, N. Gregory, 1986. "The equity premium and the concentration of aggregate shocks," Journal of Financial Economics, Elsevier, vol. 17(1), pages 211-219, September.
  12. Miles S. Kimball & N. Gregory Mankiw, 1988. "Precautionary Saving and the Timing of Taxes," NBER Working Papers 2680, National Bureau of Economic Research, Inc.
  13. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
  14. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  15. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
  16. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  17. Irwin Friend & Joel Hasbrouck, . "Effect of Inflation on the Profitability and Valuation of U.S. Corporations," Rodney L. White Center for Financial Research Working Papers 04-82, Wharton School Rodney L. White Center for Financial Research.
  18. Kihlstrom, Richard E & Romer, David & Williams, Steve, 1981. "Risk Aversion with Random Initial Wealth," Econometrica, Econometric Society, vol. 49(4), pages 911-20, June.
  19. Grossman, Sanford J. & Shiller, Robert J., 1982. "Consumption correlatedness and risk measurement in economies with non-traded assets and heterogeneous information," Journal of Financial Economics, Elsevier, vol. 10(2), pages 195-210, July.
  20. Miller, Bruce L., 1976. "The effect on optimal consumption of increased uncertainty in labor income in the multiperiod case," Journal of Economic Theory, Elsevier, vol. 13(1), pages 154-167, August.
  21. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
  22. Irwin Friend & Joel Hasbrouck, . "Effect of Inflation on the Profitability and Valuation of U.S. Corporations," Rodney L. White Center for Financial Research Working Papers 4-82, Wharton School Rodney L. White Center for Financial Research.
  23. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  24. Kimball, Miles S, 1988. "Farmers' Cooperatives as Behavior Toward Risk," American Economic Review, American Economic Association, vol. 78(1), pages 224-32, March.
  25. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
  26. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
  27. Breeden, Douglas T., 1986. "Consumption, production, inflation and interest rates : A synthesis," Journal of Financial Economics, Elsevier, vol. 16(1), pages 3-39, May.
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