The Marginal Propensity to Consume over the Business Cycle
- (pp. 351-84)
Abstract
We estimate how the marginal propensity to consume (MPC) out of liquidity varies over the business cycle. Ten years after a Chapter 7 bankruptcy, the bankruptcy flag is removed from the filer's credit report, generating an increase in credit score. In the year following flag removal, credit card limits increase by $778 and credit card balances increase by $290, implying an MPC of 0.37. Using cohorts of flag removals, we find that the MPC was 20 to 30 percent higher during the Great Recession, increased during the 2001 recession, and is positively correlated with the local unemployment rate.Citation
Gross, Tal, Matthew J. Notowidigdo, and Jialan Wang. 2020. "The Marginal Propensity to Consume over the Business Cycle." American Economic Journal: Macroeconomics, 12 (2): 351-84. DOI: 10.1257/mac.20160287Additional Materials
JEL Classification
- E21 Macroeconomics: Consumption; Saving; Wealth
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E32 Business Fluctuations; Cycles
- G51 Household Saving, Borrowing, Debt, and Wealth
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