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Precautionary Saving, Borrowing Constraints, and Fiscal Policy

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  • Cheolbeom Park
  • Thomas Bishop

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

Suggested Citation

  • Cheolbeom Park & Thomas Bishop, 2004. "Precautionary Saving, Borrowing Constraints, and Fiscal Policy," Econometric Society 2004 Far Eastern Meetings 706, Econometric Society.
    • Handle: RePEc:ecm:feam04:706
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    File URL: http://repec.org/esFEAM04/up.22270.1080722079.pdf
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    References listed on IDEAS

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    1. Thaler, Richard H, 1990. "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 193-205, Winter.
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    3. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 149-185.
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    Cited by:

    1. Roberto Bande & Dolores Riveiro, 2013. "Private Saving Rates and Macroeconomic Uncertainty: Evidence from Spanish Regional Data," The Economic and Social Review, Economic and Social Studies, vol. 44(3), pages 323-349.
    2. Carlos Arriaga & Luis Miranda, 2009. "Risk and Efficiency in Credit Concession: A Case Study in Portugal," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 7(3), pages 307-326.

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    More about this item

    Keywords

    Marginal Propensity to Consume; Borrowing Constraints; Precautionary Saving; Consumption Function; Effectiveness of Fiscal Policy;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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