An exact consumption rule with liquidity constraints and stochastic income
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.
Volume (Year): 5 (2008)
Issue (Month): 6 ()
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- Saltari, Enrico & Travaglini, Giuseppe, 2006. "The effects of future financing constraints on capital accumulation: Some new results on the constrained investment problem," Research in Economics, Elsevier, vol. 60(2), pages 85-96, June.
- Zeldes, Stephen P, 1989.
"Consumption and Liquidity Constraints: An Empirical Investigation,"
Journal of Political Economy,
University of Chicago Press, vol. 97(2), pages 305-346, April.
- Stephen Zeldes, "undated". "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
- Stephen P. Zeldes, "undated". "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
- Stephen P. Zeldes, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 275-298.
- Park, Myung-Ho, 2006. "An analytical solution to the inverse consumption function with liquidity constraints," Economics Letters, Elsevier, vol. 92(3), pages 389-394, September. Full references (including those not matched with items on IDEAS)
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