Liquidity Constraints of the Middle Class

CentER Discussion Paper Series No. 2018-039

36 Pages Posted: 11 Feb 2015 Last revised: 20 Sep 2018

See all articles by Jeffrey R. Campbell

Jeffrey R. Campbell

University of Notre Dame; Tilburg University

Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 17, 2018

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.

Keywords: Fiscal Policy, Tax Rebates, Marginal Propensity to Consume, Term Saving, Precautionary Saving

JEL Classification: E21

Suggested Citation

Campbell, Jeffrey R. and Hercowitz, Zvi, Liquidity Constraints of the Middle Class (September 17, 2018). CentER Discussion Paper Series No. 2018-039, Available at SSRN: https://ssrn.com/abstract=2563032 or http://dx.doi.org/10.2139/ssrn.2563032

Jeffrey R. Campbell (Contact Author)

University of Notre Dame ( email )

United States

Tilburg University ( email )

Tilburg, 5000 LE
Netherlands

Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 9916 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
82
Abstract Views
665
rank
229,799
PlumX Metrics