Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210103 
Year of Publication: 
2016
Series/Report no.: 
Working Paper No. 14/2016
Publisher: 
Norges Bank, Oslo
Abstract: 
Carroll and Kimball (1996) prove that the consumption function is concave if infinitely-lived risk-averse households have a utility function which exhibits Hyperbolic Absolute Risk Aversion (HARA), face income uncertainty, and are prudent. However, the empirical evidence is inconclusive about the importance of income uncertainty for households. On the other hand, empirical results suggest that liquidity and liquidity constraints are important determinants of household behavior. In this paper, I prove that the consumption function is strictly concave in wealth for infinitelylived risk-averse households with a utility function of the HARA class if there exists a liquidity constraint which binds for some level of wealth. This result is independent of prudence. Furthermore, the introduction of a liquidity constraint always reduces consumption and increases the marginal propensity to consume out of wealth.
Subjects: 
consumption
liquidity constraints
JEL: 
D11
D52
D91
Persistent Identifier of the first edition: 
ISBN: 
978-82-7553-937-1
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper
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