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Liquidity constraints and time non separable preferences

Jerome Adda and Raouf Boucekkine ()

No 1996042, Discussion Papers (REL - Recherches Economiques de Louvain) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We present an intertemporal model of consumption and savings incorporating liquidity constraints and non-separable preferences. We solve the problem numerically and characterize the optimal consumption behavior. We explore the traditional puzzles highlighted in the empirical literature as excess smoothness of consumption, its excess sensitivity to current income and its excess persistence. We show that a model with durability and liquidity constraints is able to reproduce some of the stylized facts. Next we show that some of the econometric tests are not robust and can mistake liquidity constraints for habit formation. Hence previous results establishing habit formation on US data should be interpreted with caution.

JEL-codes: C63 D91 E21 (search for similar items in EconPapers)
Pages: 25
Date: 1996-09-01
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Citations: View citations in EconPapers (2)

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