Liquidity Constraints of the Middle Class
CentER Discussion Paper Series No. 2018-039
36 Pages Posted: 11 Feb 2015 Last revised: 20 Sep 2018
Date Written: September 17, 2018
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.
Keywords: Fiscal Policy, Tax Rebates, Marginal Propensity to Consume, Term Saving, Precautionary Saving
JEL Classification: E21
Suggested Citation: Suggested Citation