Liquidity Constraints and Precautionary Saving
Economists working with numerical solutions to the optimal consumption/saving problem under uncertainty have long known that there are quantitatively important interactions between liquidity constraints and precautionary saving behavior This paper provides the analytical basis for those interactions First we explain why the introduction of a liquidity constraint increases the precautionary saving motive around levels of wealth where the constraint becomes binding Secondwe provide a rigorous basis for the oft-noted similarity between the effects of introducing uncertainty and introducing constraints by showing that in both cases the effects spring from the concavity in the consumption function which either uncertainty or constraints can induce We further show that consumption function concavity once created propagates back to consumption functions in prior periods Finally our most surprising result is that the introduction of additional constraints beyond the first one or the introduction of additional risks beyond a first risk can actually reduce the precautionary saving motive because the new constraint or risk can ‘hide?the effects of the preexisting constraints or risks
|Date of creation:||Aug 2001|
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- Kimball, Miles S, 1990.
"Precautionary Saving in the Small and in the Large,"
Econometric Society, vol. 58(1), pages 53-73, January.
- Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
- Carroll, Christopher D & Kimball, Miles S, 1996. "On the Concavity of the Consumption Function," Econometrica, Econometric Society, vol. 64(4), pages 981-992, July.
- Christopher D. Carroll & Miles S. Kimball, 1995. "On the concavity of the consumption function," Finance and Economics Discussion Series 95-10, Board of Governors of the Federal Reserve System (U.S.).
- Christopher D. Carroll & Miles S. Kimball, 1995. "On the Concavity of the Consumption Function," Macroeconomics 9503003, EconWPA.
- Besley, Timothy, 1995. "Savings, credit and insurance," Handbook of Development Economics,in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 36, pages 2123-2207 Elsevier.
- Besley, T., 1993. "Savings, Credit and Insurance," Papers 167, Princeton, Woodrow Wilson School - Development Studies.
- Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 23-45, Summer.
- Christopher D. Carroll, 2001. "A Theory of the Consumption Function, With and Without Liquidity Constraints (Expanded Version)," NBER Working Papers 8387, National Bureau of Economic Research, Inc.
- Christopher D. Carroll, 2001. "Codes for A Theory of the Consumption Function, With and Without Liquidity Constraints," QM&RBC Codes 37, Quantitative Macroeconomics & Real Business Cycles.
- Tullio Jappelli, 1990. "Who is Credit Constrained in the U. S. Economy?," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 219-234.
- Emilio Fernandez-Corugedo, 2002. "Soft liquidity constraints and precautionary saving," Bank of England working papers 158, Bank of England. Full references (including those not matched with items on IDEAS)
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