Precautionary Saving and the Marginal Propensity to Consume

46 Pages Posted: 25 Jun 2004

See all articles by Miles S. Kimball

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics; University of Colorado Boulder; Center for Economic and Social Research, USC; National Bureau of Economic Research (NBER)

Date Written: July 1990

Abstract

The marginal propensity to consume out of wealth is important for evaluating the effects of taxation on consumption, assessing the possibility of multiple equilibria due to aggregate demand spillovers, and explaining observed variations in consumption. It is also a component of the interest elasticity of consumption and the risk aversion of the value function which gives the expected present value of utility as a function of wealth. This paper analyzes the effect of uncertainty on the marginal propensity to consume within the context of the Permanent Income Hypothesis. Given plausible conditions on the utility function, income risk is found to raise the marginal propensity to consume out of wealth in a multiperiod model with many risky securities. The marginal investment portfolio for additions to wealth is also characterized.

Suggested Citation

Kimball, Miles S., Precautionary Saving and the Marginal Propensity to Consume (July 1990). NBER Working Paper No. w3403. Available at SSRN: https://ssrn.com/abstract=420287

Miles S. Kimball (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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