Precautionary Saving, Borrowing Constraints, and Fiscal Policy

Cheolbeom Park and Thomas Bishop

No 706, Econometric Society 2004 Far Eastern Meetings from Econometric Society

Abstract: Recent empirical studies suggest that the average marginal propensity to consume (MPC) has declined. This paper explains the declining trend of the MPC with a standard representative consumer model where borrowing constraints become more relaxed as suggested by data. With an increase in available credit, the consumer can easily spread out negative income shocks by credit card borrowing or consumer loans. As a result, consumers under relaxed borrowing constraints have lower MPCs than they had a generation ago. This result suggests that policy makers should now account for the less responsiveness of consumers to fiscal stimulus plans aiming at boosting consumpti

Keywords: Marginal Propensity to Consume; Borrowing Constraints; Precautionary Saving; Consumption Function; Effectiveness of Fiscal Policy (search for similar items in EconPapers)
JEL-codes: D91 E21 E62 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ecm:feam04:706

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