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.
*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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