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Liquidity Constraints of the Middle Class†

Liquidity Constraints of the Middle Class† AbstractExisting evidence from US 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 counterfactu-ally 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. (JEL D14, D15, D31, E21, H24, H31) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Economic Policy American Economic Association

Liquidity Constraints of the Middle Class†

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Publisher
American Economic Association
Copyright
Copyright © 2019 © American Economic Association
ISSN
1945-7731
DOI
10.1257/pol.20180070
Publisher site
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Abstract

AbstractExisting evidence from US 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 counterfactu-ally 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. (JEL D14, D15, D31, E21, H24, H31)

Journal

American Economic Journal: Economic Policy – American Economic Association

Published: Aug 1, 2019

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