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Working Paper, No. 2009-20, November 2009
Liquidity Constraints of the Middle Class (REVISED February 2018)
Existing evidence from the U.S. middle class shows that their MPCs out of tax rebates greatly exceed the PIH’s prediction and are weakly related to household liquid assets. In contrast, precautionary savings models predict that MPCs decrease with wealth. We bridge this gap with term saving – households’ savings for large foreseen expenditures – which we document to be empirically widespread. Once incorporated into a calibrated precautionary savings model, term saving generates realistic MPCs: The approaching expenditure simultaneously motivates asset accumulation and raises MPCs by shortening the effective planning horizon. We conclude that liquidity constraints substantially influence middle-class consumption choices.


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