Liquidity Constraints of the Middle Class

Among U.S. middle-class households, the marginal propensity to consume is either invariant to household wealth or a U-shaped function thereof. In contrast, precautionary savings models predict that wealth reduces the marginal propensity to consume. We bridge this gap between theory and data with term saving, households' savings for large forecastable expenditures. Household data indicate that term saving is widespread. Once incorporated into a calibrated precautionary savings model, it generates marginal propensities to consume like those from the data. This is because the approaching expenditure simultaneously motivates saving and raises the marginal propensity to consume by shortening the effective planning horizon.