Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/72040 
Year of Publication: 
2001
Series/Report no.: 
Working Paper No. 455
Publisher: 
The Johns Hopkins University, Department of Economics, Baltimore, MD
Abstract: 
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
Subjects: 
liquidity constraints
consumption function
uncertainty
stochastic income
precautionary saving
JEL: 
C6
D91
E21
Document Type: 
Working Paper

Files in This Item:
File
Size
600.23 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.