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Liquidity Constraints of the Middle Class

Author

Listed:
  • Jeffrey R. Campbell
  • Zvi Hercowitz

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.

Suggested Citation

  • Jeffrey R. Campbell & Zvi Hercowitz, 2019. "Liquidity Constraints of the Middle Class," American Economic Journal: Economic Policy, American Economic Association, vol. 11(3), pages 130-155, August.
    • Handle: RePEc:aea:aejpol:v:11:y:2019:i:3:p:130-55
    Note: DOI: 10.1257/pol.20180070
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    Citations

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    Cited by:

    1. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, May.
    2. Claudio Michelacci & Andrea Pozzi & Luigi Paciello, 2018. "The extensive margin of aggregate consumption demand," 2018 Meeting Papers 1008, Society for Economic Dynamics.
    3. Marco Angrisani & Sergio Barrera & Luisa R. Blanco & Salvador Contreras, 2021. "The racial/ethnic gap in financial literacy in the population and by income," Contemporary Economic Policy, Western Economic Association International, vol. 39(3), pages 524-536, July.
    4. Ni, Yinan & Barth, James R. & Sun, Yanfei, 2022. "On the dynamic capital structure of nations: Theory and empirics," Research in International Business and Finance, Elsevier, vol. 62(C).
    5. Joseph Vavra & David Berger, 2012. "Consumption Dynamics During the Great Recession," 2012 Meeting Papers 109, Society for Economic Dynamics.
    6. Miranda-Pinto, Jorge & Murphy, Daniel & Walsh, Kieran James & Young, Eric R., 2025. "A model of expenditure shocks," Journal of Monetary Economics, Elsevier, vol. 154(C).
    7. Kirkby, J. Lars & Mitra, Sovan & Nguyen, Duy, 2020. "An analysis of dollar cost averaging and market timing investment strategies," European Journal of Operational Research, Elsevier, vol. 286(3), pages 1168-1186.
    8. Davide Melcangi & Vincent Sterk, 2025. "Stock Market Participation, Inequality, and Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 92(4), pages 2656-2690.
    9. Max. A. Mosley & Edmund Cornforth, 2023. "The Macroeconomic Effect of the UK’s 2022 Cost-of-Living Payments," Discussion Papers 2316, Centre for Macroeconomics (CFM).
    10. Shilpi Batham & Hitesh Arora & Vibhuti Gupta, 2025. "Investigation of the Antecedents of Personal Saving Behavior: A Systematic Literature Review Using TCM-ADO Framework," JRFM, MDPI, vol. 18(10), pages 1-43, October.
    11. Campbell, Jeffrey R. & Hercowitz, Zvi, 2009. "The Financial Labor Supply Accelerator," Foerder Institute for Economic Research Working Papers 275727, Tel-Aviv University > Foerder Institute for Economic Research.
    12. Greg Kaplan & Giovanni L. Violante, 2014. "A Model of the Consumption Response to Fiscal Stimulus Payments," Econometrica, Econometric Society, vol. 82(4), pages 1199-1239, July.
    13. Jeon, Woongchan & Walsh, Kieran James, 2025. "Heterogeneity and macroeconomic state dependence in the spending response to stimulus," Economics Letters, Elsevier, vol. 247(C).
    14. Maude Toussaint‐Comeau, 2021. "Liquidity constraints and debts: Implications for the saving behavior of the middle class," Contemporary Economic Policy, Western Economic Association International, vol. 39(3), pages 479-493, July.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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