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Liquidity Constraints of the Middle Class

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  • Campbell, J.R.
  • Hercowitz, Zvi

Abstract

Among U.S. middle-class households, the marginal propensity to consume is either invariant to household wealth or a U-shaped function thereof. In contrast, precautionary savings models predict that wealth reduces the marginal propensity to consume. We bridge this gap between theory and data with term saving, households' savings for large forecastable expenditures. Household data indicate that term saving is widespread. Once incorporated into a calibrated precautionary savings model, it generates marginal propensities to consume like those from the data. This is because the approaching expenditure simultaneously motivates saving and raises the marginal propensity to consume by shortening the effective planning horizon.

Suggested Citation

  • Campbell, J.R. & Hercowitz, Zvi, 2015. "Liquidity Constraints of the Middle Class," Discussion Paper 2015-009, 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. Jeffrey R. Campbell & Zvi Hercowitz, 2011. "The financial labor supply accelerator," Working Paper Series WP-2011-05, Federal Reserve Bank of Chicago.
    2. 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.

    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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