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Liquidity Constraints
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The theory of intertemporal choice that we have developed so far assumes that there are no imperfections in the credit market. The ability to borrow and save as much as needed—imposing only the intertemporal budget constraint—allows the transfer of resources over time and thus maintenance of a stable consumption profile through the life cycle. The chapter studies how the consumer’s problem changes in the presence of credit market frictions. The latter may explain why consumption growth is sensitive to expected changes in income (excess sensitivity of consumption) and why it is greater than predicted by the certainty equivalence model (excess growth of consumption).
Title: Liquidity Constraints
Description:
The theory of intertemporal choice that we have developed so far assumes that there are no imperfections in the credit market.
The ability to borrow and save as much as needed—imposing only the intertemporal budget constraint—allows the transfer of resources over time and thus maintenance of a stable consumption profile through the life cycle.
The chapter studies how the consumer’s problem changes in the presence of credit market frictions.
The latter may explain why consumption growth is sensitive to expected changes in income (excess sensitivity of consumption) and why it is greater than predicted by the certainty equivalence model (excess growth of consumption).
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