Consumption And Credit: A Model Of Time-Varying Liquidity Constraints

Sydney Ludvigson

The Review of Economics and Statistics, 1999, vol. 81, issue 3, 434-447

Abstract: This paper studies the optimal consumption behavior of individuals who face borrowing limitations that vary stochastically with their income. This framework is motivated by new empirical evidence that I document in U.S. aggregate data: predictable growth in consumer credit is significantly related to consumption growth, a finding that is inconsistent with existing models of consumer behavior. The time-varying liquidity constraint model considered here correctly predicts two key properties of the U.S. aggregate data: the correlation of consumption growth with predictable credit growth documented in this paper, and the well-known correlation between consumption growth and predictable income growth that has been documented extensively elsewhere. © 1999 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Date: 1999
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Working Paper: Consumption and credit: a model of time-varying liquidity constraints (1996)
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