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The Marginal Propensity to Consume out of Liquidity

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  • Deniz Aydin

    (Stanford University)

Abstract

This paper presents novel tests of competing models of intertemporal consumption behavior using unique European administrative 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 a randomized controlled trial implemented in September 2014 involving fifty-five thousand individuals. I obtain four empirical results: First, borrowing constraints change consumption dynamics even when they are not strictly binding. Two-thirds of the population accumulate a significant average of 20 cent of debt per dollar limit increase, relative to the control group. Second, the heterogeneity of the MPC is exclusively in line with precautionary models, a decreasing function of cash-on-hand. Third, the debt response to liquidity and credit card utilization are stationary. Fourth, additional liquidity is spent mostly on durables and services using installments, with a smaller fraction spent on non-durables and taken out as cash advances. I then use a workhorse Bewley model with realistic income risk and show that the joint dynamics of consumption, debt and the balance sheet in response to a change in borrowing constraints can be used to calibrate and test intertemporal models. Debt response to liquidity shocks identifies preference parameters via a simulated moments estimator. Hump-shaped debt response and mean-reverting credit card utilization are not consistent with myopia as the underlying preferences.

Suggested Citation

  • Deniz Aydin, 2015. "The Marginal Propensity to Consume out of Liquidity," Discussion Papers 15-010, Stanford Institute for Economic Policy Research.
    • Handle: RePEc:sip:dpaper:15-010
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    2. 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.
    3. Francesco D’Acunto & Thomas Rauter & Christoph K. Scheuch & Michael Weber, 2020. "Perceived Precautionary Savings Motives: Evidence from FinTech," NBER Working Papers 26817, National Bureau of Economic Research, Inc.
    4. 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.
    5. 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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    More about this item

    Keywords

    consumption; debt; borrowing con- straints; precautionary saving; permanent income hypothesis; field experiment.;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • 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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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