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

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  • Deniz Aydin

    (Stanford)

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.

Suggested Citation

  • Deniz Aydin, 2015. "The marginal propensity to consume out of liquidity: Evidence from a randomized controlled trial," 2015 Meeting Papers 270, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:270
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    Cited by:

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    2. Andreas Fagereng & Martin B. Holm & Gisle J. Natvik, 2021. "MPC Heterogeneity and Household Balance Sheets," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(4), pages 1-54, October.
    3. Scott L. Fulford & Scott Schuh, 2023. "Revolving versus Convenience Use of Credit Cards: Evidence from U.S. Credit Bureau Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(7), pages 1667-1701, October.
    4. Lawrence Santucci, 2016. "What Happened to the Revolving Credit Card Balances of 2009?," Consumer Finance Institute discussion papers 16-1, Federal Reserve Bank of Philadelphia.
    5. Sumit Agarwal & Souphala Chomsisengphet & Neale Mahoney & Johannes Stroebel, 2018. "Do Banks Pass through Credit Expansions to Consumers Who want to Borrow?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(1), pages 129-190.
    6. Tal Gross & Matthew J. Notowidigdo & Jialan Wang, 2020. "The Marginal Propensity to Consume over the Business Cycle," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(2), pages 351-384, April.
    7. Scott L. Fulford & Scott Schuh, 2017. "Credit card utilization and consumption over the life cycle and business cycle," Working Papers 17-14, Federal Reserve Bank of Boston.
    8. Scott Fulford & Scott Schuh, 2020. "Credit Cards, Credit Utilization, and Consumption," Working Papers 19-07, Department of Economics, West Virginia University.

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