Working Paper

Liquidity constraints of the middle class


Abstract: There is evidence that a household's consumption response to transitory income does not decline, and perhaps increases, with the level of financial assets it holds. That is, middle class households with assets act as if they face liquidity constraints. This paper addresses this puzzling observation with a model of impatient households that face a large recurring expenditure. In spite of impatience, they save as this expenditure draws near. The authors call such saving made in preparation for a foreseeable event at a given future date \\"term saving.\\" Term saving reverses the role of assets in the presence of liquidity constraints.

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Authors

    Campbell, Jeffrey R.

    Hercowitz, Zvi

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2009

Number: WP-09-20