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The marginal propensity to consume out of liquidity: Evidence from a randomized controlled trial

Deniz Aydin
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Deniz Aydin: Stanford

No 270, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

Date: 2015
New Economics Papers: this item is included in nep-exp
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