The marginal propensity to consume out of liquidity: Evidence from a randomized controlled trial
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Deniz Aydin: Stanford
No 270, 2015 Meeting Papers from Society for Economic Dynamics
This paper presents novel tests of competing models of inter temporal consumption behavior using unique European panel data on income, spending and assets. I estimate the marginal propensity to consume (MPC) out of liquidity, the debt response to a change in borrowing capacity, using changes in credit card limits in an ongoing randomized controlled trial involving thirty thousand individuals. I obtain four empirical results: (i) consumers, even those that are away from a binding borrowing constraint, respond aggressively to a change in borrowing limits, accumulating an average of 20 cents of debt per dollar change in limit (ii) in line with models that predict a concave consumption function, the MPC is a decreasing function of cash-on-hand (iii) the cumulative response of debt and credit utilization is mean reverting: for the lowest cash-on-hand quartile the cumulative response is more than 0.5 after 6 months; however, the debt stock drops back to zero after 18 months. (observational data) (iv) additional liquidity is spent on both durables and non-durables, as well as taken out as cash advances.
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:270
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More papers in 2015 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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