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Liquidity Constraints of the Middle Class

Zvi Hercowitz () and Jeffrey Campbell ()

No 323, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: This paper combines impatience with large recurring expenditures to replicate the observation that middle-class U.S. households consume much more out of transitory income than permanent income theory predicts. In the present model, households make a large recurring expenditure of exogenous timing and endogenous size; hence, in spite of their impatience, households save in anticipation of this expenditure. When it occurs, a borrowing constraint taking the form of equity requirements on collateralizable durable goods limits household's debt. Although the standard Euler equation usually holds good, the household is always liquidity constrained, in the sense that they value assets that provide liquidity more than their fundamental value. These constraints are strongest when wealth is highest. We contrast a calibrated version of the model with evidence from the 2001 tax rebate.

Date: 2009
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https://economicdynamics.org/meetpapers/2009/paper_323.pdf (application/pdf)

Related works:
Journal Article: Liquidity Constraints of the Middle Class (2019) Downloads
Working Paper: Liquidity Constraints of the Middle Class (2012) Downloads
Working Paper: Liquidity Constraints of the Middle Class (2009) Downloads
Working Paper: Liquidity constraints of the middle class (2009) Downloads
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