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Liquidity constraints and time non-separable preferences: simulating models with large state spaces

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  • Boucekkine, Raouf
  • Adda, Jerome

Abstract

This paper presents an alternative method for the stochastic simulation of nonlinear and possibly non-differentiable models with large state spaces. We compare our method to other existing methods, and show that the accuracy is satisfactory. We then use the method to analyze the features of an intertemporal optimizing consumption-saving model, when the utility function is time non-separable and when liquidity constraints are imposed. Two non-separabilities are studied, habit persistence and durability of the commodity. As the model has no closed-form solution, we compute deterministic and stochastic solution paths. It enables us to compare income and consumption volatility, and to describe the density of consumption under the different hypotheses on the utility function.

Suggested Citation

  • Boucekkine, Raouf & Adda, Jerome, 1995. "Liquidity constraints and time non-separable preferences: simulating models with large state spaces," UC3M Working papers. Economics 3911, Universidad Carlos III de Madrid. Departamento de Economía.
  • Handle: RePEc:cte:werepe:3911
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    References listed on IDEAS

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    3. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
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    6. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-396, March.
    7. Gagnon, Joseph E, 1990. "Solving the Stochastic Growth Model by Deterministic Extended Path," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 35-36, January.
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    9. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters,in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
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    11. repec:fth:harver:1435 is not listed on IDEAS
    12. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-481, March.
    13. Novales, Alfonso, 1990. "Solving Nonlinear Rational Expectations Models: A Stochastic Equilibrium Model of Interest Rates," Econometrica, Econometric Society, vol. 58(1), pages 93-111, January.
    14. Marjorie Flavin, 1985. "Excess Sensitivity of Consumption to Current Income: Liquidity Constraints or Myopia?," Canadian Journal of Economics, Canadian Economics Association, vol. 18(1), pages 117-136, February.
    15. Heaton, John, 1993. "The Interaction between Time-Nonseparable Preferences and Time Aggregation," Econometrica, Econometric Society, vol. 61(2), pages 353-385, March.
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    Keywords

    Stochastic simulations;

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