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Consumer Default and the Life Cycle Model

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  • Lawrance, Emily C
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    Abstract

    This paper studies the impact of a default option on life-cycle consumption. Using a two period life-cycle model with uncertain income, the paper demonstrates that a default option causes a kink in both the budget set and the indifference curve at the point where the individual switches from saving to borrowing. This nonconvexity can have a dramatic impact on optimal consumption. The paper also explores the circumstances under which liquidity constraints are likely to emerge and the characteristics of those borrowers who are likely to face constraints. Copyright 1995 by Ohio State University Press.

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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 27 (1995)
    Issue (Month): 4 (November)
    Pages: 939-54

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    Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:4:p:939-54

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    Cited by:
    1. Bacchetta, Philippe & Gerlach, Stefan, 1997. "Consumption and Credit Constraints: International evidence," CEPR Discussion Papers 1727, C.E.P.R. Discussion Papers.
    2. Michal Rubaszek & Dobromil Serwa, 2011. "Determinants of credit to households in a life-cycle model," National Bank of Poland Working Papers 92, National Bank of Poland, Economic Institute.
    3. Ingrid Größl & Ulrich Fritsche, 2007. "The Store-of-Value-Function of Money as a Component of Household Risk Management," Discussion Papers of DIW Berlin 660, DIW Berlin, German Institute for Economic Research.
    4. Rinaldi, Laura & Sanchis-Arellano, Alicia, 2006. "Household debt sustainability: what explains household non-performing loans? An empirical analysis," Working Paper Series 0570, European Central Bank.

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