Consumption, Liquidity Constraints and Asset Accumulation in the Presence of Random Income Fluctuations
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.
|Date of creation:||May 1984|
|Date of revision:||Jul 1985|
|Publication status:||Published in Economic Review (June 1987), 28(2): 339-351|
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