The marginal propensity to consume over the business cycle

Tal Gross, Matthew J. Notowidigdo, Jialan Wang

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)351-384
Number of pages34
JournalAmerican Economic Journal: Macroeconomics
Volume12
Issue number2
DOIs
StatePublished - Apr 1 2020

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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