Optimal Consumption and Investment under Time-Varying Liquidity Constraints

Seryoong Ahn, Kyoung Jin Choi and Byung Hwa Lim

Journal of Financial and Quantitative Analysis, 2019, vol. 54, issue 4, 1643-1681

Abstract: We study consumption and investment decisions given realistic time-varying constraints on borrowing. We first consider the case where borrowing is constrained by a maximum debt-to-income ratio. We then consider collateral borrowing with a maximum loan-to-value ratio. The resulting implications for optimal policies differ considerably from those obtained in the existing literature based on fixed borrowing limits but are consistent with those documented in the empirical literature.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:54:y:2019:i:04:p:1643-1681_00

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