NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Precautionary Saving and the Marginal Propensity to Consume

Miles S. Kimball

NBER Working Paper No. 3403
Issued in July 1990
NBER Program(s):   ME

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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Document Object Identifier (DOI): 10.3386/w3403

Published: With N. Gregory Mankiw, published as "Precautionary Saving and the Timingof Taxes", JPE, Vol. 97, no. 4 (1989): 863-879.

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