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The Marginal Propensity to Consume over the Business Cycle

Author

Listed:
  • Tal Gross
  • Matthew J. Notowidigdo
  • Jialan Wang

Abstract

We estimate how the marginal propensity to consume (MPC) out of liquidity varies over the business cycle. Ten years after a Chapter 7 bankruptcy, the bankruptcy flag is removed from the filer's credit report, generating an increase in credit score. In the year following flag removal, credit card limits increase by $778 and credit card balances increase by $290, implying an MPC of 0.37. Using cohorts of flag removals, we find that the MPC was 20 to 30 percent higher during the Great Recession, increased during the 2001 recession, and is positively correlated with the local unemployment rate.

Suggested Citation

  • Tal Gross & Matthew J. Notowidigdo & Jialan Wang, 2020. "The Marginal Propensity to Consume over the Business Cycle," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(2), pages 351-384, April.
    • Handle: RePEc:aea:aejmac:v:12:y:2020:i:2:p:351-84
    DOI: 10.1257/mac.20160287
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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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