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Precautionary Savings under Liquidity Constraints: A Decomposition

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  • Xu, Xiaonian
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    Abstract

    This paper investigates the effects of liquidity constraints on consumption/saving by separating precautionary saving caused by liquidity constraints (PS2) from the conventional precautionary saving made against income uncertainty (PS1). It is proved that there exists a unique level of wealth below which PS2 is strictly positive and above which liquidity constraints have no effects at all. The numerical simulations show that PS2 is quantitatively important, depending on age and the level of wealth. Some empirical findings in the literature cannot be explained by PS1 alone but are consistent with the model in which PS2 is present. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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    Bibliographic Info

    Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

    Volume (Year): 36 (1995)
    Issue (Month): 3 (August)
    Pages: 675-90

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    Handle: RePEc:ier:iecrev:v:36:y:1995:i:3:p:675-90

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    Cited by:
    1. Scott, Andrew, 2000. "Optimal consumption when capital markets are imperfect," Economics Letters, Elsevier, vol. 66(1), pages 65-70, January.
    2. Angelos A. Antzoulatos, 1996. "Capital flows & current account deficits in the 1990s: why did Latin America & East Asian countries respond differently?," Research Paper 9610, Federal Reserve Bank of New York.
    3. Jeong-Joon Lee & Yasuyuki Sawada, 2005. "Precautionary Saving under LiquidityConstraints: Evidence from Rural Pakistan," CIRJE F-Series CIRJE-F-377, CIRJE, Faculty of Economics, University of Tokyo.
    4. Osborne, Theresa, 2006. "Credit and risk in rural developing economies," Journal of Economic Dynamics and Control, Elsevier, vol. 30(4), pages 541-568, April.
    5. Clemens, Christiane, 1999. "Income Taxation, Government Expenditure, and Long-Run Stochastic Growth," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-220, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    6. Jeong-Joon Lee & Yasuyuki Sawada, 2005. "Precautionary Saving under Liquidity Constraints: Evidence from Rural Pakistan (Published in "Journal of Development Economics". )," CARF F-Series CARF-F-051, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    7. Kurma? Akdogan, 2012. "Foreign exchange reserves in a credit constrained economy," Economie Internationale, CEPII research center, issue 130, pages 59-79.
    8. Feigenbaum, James, 2011. "Precautionary saving or denied dissaving," Economic Modelling, Elsevier, vol. 28(4), pages 1559-1572, July.
    9. James Feigenbaum, 2005. "Heterogeneity vs Uncertainty in Anticipation of a Borrowing Constraint," Working Papers 230, University of Pittsburgh, Department of Economics, revised Jan 2005.

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