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Consumption and Uncertain Access to the Asset Market

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Author Info
Rudanko, Leena

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Abstract

This paper presents a new approach to modelling credit restrictions by considering uncertain access to the asset market. The asset market and the stochastic process governing access are considered fully exogenous and independent of income. The model generates stable debt trajectories for a broader array of interest rate levels than the one corresponding to the agent’s rate of time preference. The agent exhibits excess sensitivity of consumption to current period income, even for low probabilities of constraints. Because this sensitivity is inversely related to the maturity of debt contracts, the availability of long-term debt contracts reduces the income-sensitivity of consumption. A very tractable approximative Euler equation for the model is presented.

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File URL: http://www.bof.fi/NR/rdonlyres/AB6423AE-26E7-4262-8D0B-4075DB6D1898/0/0023.pdf
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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 23/2000.

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Length: 36 pages
Date of creation: 11 Dec 2000
Date of revision:
Handle: RePEc:hhs:bofrdp:2000_023

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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Related research
Keywords: consumption; liquidity constraints; permanent income hypothesis;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hyytinen , Ari & Takalo, Tuomas, 2000. "Enhancing Bank Transparency: A Re-assessment," Research Discussion Papers 10/2000, Bank of Finland. [Downloadable!]
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  2. Hyytinen, Ari & Toivanen, Otto, 2000. "Monitoring and Market Power in Loan Markets," Research Discussion Papers 9/2000, Bank of Finland. [Downloadable!]
  3. Seppala, Juha, 2004. "The term structure of real interest rates: theory and evidence from UK index-linked bonds," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1509-1549, October. [Downloadable!] (restricted)
  4. Mayes, David G & Virén, Matti, 2000. "Asymmetry and the Problem of Aggregation in the Euro Area," Research Discussion Papers 11/2000, Bank of Finland. [Downloadable!]
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  5. Hasan , Iftekhar & Malkamäki, Markku, 2000. "Are Expansions Cost Effective for Stock Exchanges? A Global Perspective," Research Discussion Papers 20/2000, Bank of Finland. [Downloadable!]
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  6. Iacoviello, Matteo & Minetti, Raoul, 2000. "The Credit Channel of Monetary Policy and Housing Markets: International Empirical Evidence," Research Discussion Papers 14/2000, Bank of Finland. [Downloadable!]
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This page was last updated on 2009-12-3.

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