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Optimal consumption with time-inconsistent preferences

Liya Liu (), Yingjie Niu (), Yuanping Wang () and Jinqiang Yang ()
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Liya Liu: Shanghai Institute of International Finance and Economics
Yingjie Niu: Shanghai University of Finance and Economics
Yuanping Wang: Shanghai University of Finance and Economics
Jinqiang Yang: Shanghai Institute of International Finance and Economics

Economic Theory, 2020, vol. 70, issue 3, No 7, 785-815

Abstract: Abstract This paper extends the standard continuous-time buffer-stock savings model with borrowing constraints by introducing time-inconsistent agent preferences. Interestingly, it predicts that time-inconsistent preferences will strengthen the consumption motive, and this makes the agent’s borrowing constraints more severe and generates higher MPCs out of liquidity, which provides an alternative explanation for the “excess sensitivity” to liquidity from the perspective of time-inconsistent preferences. Moreover, by incorporating time-inconsistent preferences, our theoretical model also provides support for the empirical evidence of “excess smoothness.”

Keywords: Time-inconsistent preferences; MPC; Excess sensitivity; Excess smoothness (search for similar items in EconPapers)
JEL-codes: D11 D91 E21 G11 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s00199-019-01228-1

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