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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.

Suggested Citation

  • Richard H. Clarida, 1984. "Consumption, Liquidity Constraints and Asset Accumulation in the Presence of Random Income Fluctuations," Cowles Foundation Discussion Papers 705R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1985.
  • Handle: RePEc:cwl:cwldpp:705r
    Note: CFP 689.
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    1. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g704ld0h3 is not listed on IDEAS
    2. Chamley, Christophe, 2001. "Capital income taxation, wealth distribution and borrowing constraints," Journal of Public Economics, Elsevier, vol. 79(1), pages 55-69, January.
    3. Nicolas Coeurdacier & Helene Rey & Pablo Winant, 2011. "The Risky Steady State," American Economic Review, American Economic Association, vol. 101(3), pages 398-401, May.
    4. Li, Geng, 2009. "Transaction costs and consumption," Journal of Economic Dynamics and Control, Elsevier, vol. 33(6), pages 1263-1277, June.
    5. Chatterjee, Partha & Shukayev, Malik, 2012. "A stochastic dynamic model of trade and growth: Convergence and diversification," Journal of Economic Dynamics and Control, Elsevier, vol. 36(3), pages 416-432.
    6. Cunha, Flavio & Heckman, James J. & Lochner, Lance, 2006. "Interpreting the Evidence on Life Cycle Skill Formation," Handbook of the Economics of Education, Elsevier.
    7. Yannis M. Ioannides & Vassilis A. Hajivassiliou, 2007. "Unemployment and liquidity constraints," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(3), pages 479-510.
    8. Patrick Honohan, 1995. "The Impact of Financial and Fiscal Policies on Saving," Papers WP059, Economic and Social Research Institute (ESRI).
    9. Hubbard, R. Glenn & Skinner, Jonathan & Zeldes, Stephen P., 1994. "The importance of precautionary motives in explaining individual and aggregate saving," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 59-125, June.
    10. Acikgoz, Omer, 2015. "On the Existence of Equilibrium in Bewley Economies with Production," MPRA Paper 69061, University Library of Munich, Germany.
    11. Sarno, Lucio & Taylor, Mark P., 1998. "Real Interest Rates, Liquidity Constraints and Financial Deregulation: Private Consumption Behavior in the U.K," Journal of Macroeconomics, Elsevier, vol. 20(2), pages 221-242, April.
    12. Acikgoz, Omer, 2015. "On the Existence and Uniqueness of Stationary Equilibrium in Bewley Economies with Production," MPRA Paper 71066, University Library of Munich, Germany, revised 30 Apr 2016.
    13. repec:eee:jetheo:v:173:y:2018:i:c:p:18-55 is not listed on IDEAS
    14. Bernard Walley, 2015. "Macroeconomic sources of foreign exchange risk premium: evidence from South Africa," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(2), pages 382-395, April.
    15. Fulford, Scott L., 2013. "The effects of financial development in the short and long run: Theory and evidence from India," Journal of Development Economics, Elsevier, vol. 104(C), pages 56-72.
    16. Partha Chatterjee & Malik Shukayev, 2006. "Convergence in a Stochastic Dynamic Heckscher-Ohlin Model," Staff Working Papers 06-23, Bank of Canada.
    17. Paul Hiebert & Javier J. Pérez & Massimo Rostagno, 2002. "Debt reduction and automatic stabilisation," Economic Working Papers at Centro de Estudios Andaluces E2002/12, Centro de Estudios Andaluces.
    18. Vassilis A. Hajivassiliou & Yannis M. Ioannides, 1992. "A Note on the Dual Approach to the Existence and Characterization of Optimal Consumption Decisions Under Uncertainty and Liquidity Constraints," Cowles Foundation Discussion Papers 1018, Cowles Foundation for Research in Economics, Yale University.
    19. Dunbar, Geoffrey, 2013. "Returns-to-scale and the equity premium puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 37(9), pages 1736-1754.
    20. Hajivassiliou, Vassilis A. & Ioannides, Yannis M., 1996. "Duality and liquidity constraints under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1177-1192.
    21. Rabault, Guillaume, 2002. "When do borrowing constraints bind? Some new results on the income fluctuation problem," Journal of Economic Dynamics and Control, Elsevier, vol. 26(2), pages 217-245, February.

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