'Risky Habits' and the Marginal Propensity to Consume Out of Permanent Income or How Much Would a Permanent Tax Cut Boost Japanese Consumption?
Papers in a variety of disparate literatures have recently suggested that habit formation in consumption may explain several empirical puzzles ranging from the level and cyclical variability of the equity premium (Abel (19901999); Constantinides (1990); Jermann (1998); Campbell and Cochrane (1999)) to the 'excess smoothness' of aggregate consumption (Fuhrer (2000)) to the apparent fact that increases in economic growth cause subsequent increases in aggregate saving rates (Carroll and Weil (1994); Bosworth (1993); Attanasio Picci and Scorcu (2000); Rodrik (1999); Loayza Schmidt-Hebbel and Serven (2000)) This paper examines an implication of these models that has mostly been overlooked: Habits strong enough to solve these puzzles imply an immediate marginal propensity to consume out of permanent shocks of much less than one When the model is calibrated to roughly match the rise in the Japanese saving rate over the postwar period it implies that the immediate MPC out of permanent tax cuts may be as low as 30 percent suggesting that calls for a permanent income tax cut as a quick means of stimulating aggregate demand in Japan may be misguided
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||Jul 2000|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.econ.jhu.edu
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:jhu:papers:429. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (None)The email address of this maintainer does not seem to be valid anymore. Please ask None to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.