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Liquidity Constraints of the Middle Class (revision of CentER DP 2015-009)

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  • Campbell, J.R.

    (Tilburg University, Center For Economic Research)

  • Hercowitz, Zvi

Abstract

Existing evidence from U.S. 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

  • Campbell, J.R. & Hercowitz, Zvi, 2015. "Liquidity Constraints of the Middle Class (revision of CentER DP 2015-009)," Discussion Paper 2018-039, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:3ac40903-deab-40a3-9847-13d92133592c
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    References listed on IDEAS

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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. Claudio Michelacci & Andrea Pozzi & Luigi Paciello, 2018. "The extensive margin of aggregate consumption demand," 2018 Meeting Papers 1008, Society for Economic Dynamics.
    3. 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.

    More about this item

    Keywords

    fiscal policy; tax rebates; marginal propensity to consume; term saving; precautionary saving;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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