Precautionary Saving and the Marginal Propensity to Consume / Miles S. Kimball.

By:

Kimball, Miles S

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w3403.Publication details: Cambridge, Mass. National Bureau of Economic Research 1990.Description: 1 online resource: illustrations (black and white)Online resources:

Available additional physical forms:

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Abstract: The marginal propensity to consume out of wealth is important for evaluating the effects of taxation on consumption, assessing the possibility of multiple equilibria due to aggregate demand spillovers, and explaining observed variations in consumption. It is also a component of the interest elasticity of consumption and the risk aversion of the value function which gives the expected present value of utility as a function of wealth. This paper analyzes the effect of uncertainty on the marginal propensity to consume within the context of the Permanent Income Hypothesis. Given plausible conditions on the utility function, income risk is found to raise the marginal propensity to consume out of wealth in a multiperiod model with many risky securities. The marginal investment portfolio for additions to wealth is also characterized.

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Working Paper	Biblioteca Digital	Colección NBER	nber w3403 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w3400 Asymmetric Information and Financial Crises: A Historical Perspective /	nber w3401 Capital Positions of Japanese Banks /	nber w3402 The Consumption of Stockholders and Non-Stockholders /	nber w3403 Precautionary Saving and the Marginal Propensity to Consume /	nber w3404 U.S. Demographics and Saving: Predictions of Three Saving Models /	nber w3405 Tax Aspects of Policy Towards Aging Populations: Canada and the United States /	nber w3406 P* Type Models: Evaluation and Forecasts /	Next

July 1990.

The marginal propensity to consume out of wealth is important for evaluating the effects of taxation on consumption, assessing the possibility of multiple equilibria due to aggregate demand spillovers, and explaining observed variations in consumption. It is also a component of the interest elasticity of consumption and the risk aversion of the value function which gives the expected present value of utility as a function of wealth. This paper analyzes the effect of uncertainty on the marginal propensity to consume within the context of the Permanent Income Hypothesis. Given plausible conditions on the utility function, income risk is found to raise the marginal propensity to consume out of wealth in a multiperiod model with many risky securities. The marginal investment portfolio for additions to wealth is also characterized.