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Saving-Constrained Households

Author

Listed:
  • Jorge Miranda-Pinto

    (University of Queensland)

  • Daniel Murphy

    (University of Virginia)

  • Eric Young

    (University of Virginia)

  • Kieran Walsh

    (University of Virginia)

Abstract

We develop a theory of saving-constrained households to explain the following facts that are difficult to reconcile with existing theories: 1) Consumption is excessively volatile relative to income (established fact), 2) a large fraction of high-debt households exhibit marginal propensities to consume near zero, 3) lagged high expenditure is associated with low contemporaneous spending propensities. Our proposed interpretation of these facts is that household expenditure depends on time-varying minimum consumption thresholds that, if violated, yield substantial utility costs. We demonstrate that such a model can match many features of the joint dynamics of income and consumption. Our theory has implications for the propagation of macroeconomic shocks.

Suggested Citation

  • Jorge Miranda-Pinto & Daniel Murphy & Eric Young & Kieran Walsh, 2019. "Saving-Constrained Households," 2019 Meeting Papers 1456, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1456
    as

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    References listed on IDEAS

    as
    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Nicholas S. Souleles & Jonathan A. Parker & David S. Johnson, 2006. "Household Expenditure and the Income Tax Rebates of 2001," American Economic Review, American Economic Association, vol. 96(5), pages 1589-1610, December.
    3. Claudia R. Sahm & Matthew D. Shapiro & Joel Slemrod, 2015. "Balance-Sheet Households and Fiscal Stimulus: Lessons from the Payroll Tax Cut and Its Expiration," NBER Working Papers 21220, National Bureau of Economic Research, Inc.
    4. Tullio Jappelli & Luigi Pistaferri, 2014. "Fiscal Policy and MPC Heterogeneity," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 107-136, October.
    5. Jorge Miranda-Pinto & Daniel Murphy & Eric Young & Kieran Walsh, 2018. "Debt Burdens and the Interest Rate Response to Fiscal Stimulus: Theory and Cross-Country Evidence," 2018 Meeting Papers 936, Society for Economic Dynamics.
    6. Kanishka Misra & Paolo Surico, 2014. "Consumption, Income Changes, and Heterogeneity: Evidence from Two Fiscal Stimulus Programs," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 84-106, October.
    7. Greg Kaplan & Giovanni L. Violante, 2014. "A Model of the Consumption Response to Fiscal Stimulus Payments," Econometrica, Econometric Society, vol. 82(4), pages 1199-1239, July.
    8. Jorge Miranda-Pinto & Daniel Murphy & Kieran James Walsh & Eric R. Young, 2019. "Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus: Theory and Cross-Country Evidence," Discussion Papers Series 609, School of Economics, University of Queensland, Australia.
    9. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
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