Travaglini Giuseppe () (Università di Urbino Carlo Bo, Facoltà di Economia)
Abstract
This model provides a closed form solution to the problem of liquidity constrained consumption with stochastic income. To keep the model tractable we employ a quadratic utility function. Income follows a geometric Brownian motion. The analytical solution exhibits a smooth, non linear, relation between consumption and income along the optimizing path even when the constraint binds. This outcome confirms the assertions in the literature that even liquidity constrained consumers may satisfy the standard Euler equation. But, in our model this result emerges from the analytical solution.
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Article provided by Economics Bulletin in its journal Economics Bulletin.
Volume (Year): 5 (2008) Issue (Month): 6 () Pages: 1-9 Download reference. The following formats are available: HTML,
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Handle: RePEc:ebl:ecbull:v:5:y:2008:i:6:p:1-9
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Find related papers by JEL classification: E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment C6 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming
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