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Consumption, Liquidity Constraints and Asset Accumulation in the Presence of Random Income Fluctuations

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  • Richard H. Clarida

Abstract

Recent empirical research, Flavin (1981), Hagashi (1982), has rejected the certainty-equivalent formulation of permanent income hypothesis, Hall (1978). These findings are often attributed to households' inability to borrow completely against expected future labor income. This paper is a theoretical investigation of optimal consumption behavior under risk aversion, random income fluctuations, and borrowing restrictions. Our principle objective is to establish the existence and to investigate the properties of the stationary probability distribution which characterizes the asymptotic behavior of consumption under these conditions.

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File URL: http://cowles.econ.yale.edu/P/cd/d07a/d0705-r.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 705R.

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Length: 24 pages
Date of creation: May 1984
Date of revision: Jul 1985
Publication status: Published in Economic Review (June 1987), 28(2): 339-351
Handle: RePEc:cwl:cwldpp:705r

Note: CFP 689.
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Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Permanent income hypothesis; optimal consumption behavior;

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