Consumption, Liquidity Constraints and Asset Accumulation in the Presence of Random Income Fluctuations

Richard Clarida

No 705R, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Recent empirical research, Flavin (1981), Hagashi (1982), has rejected the certainty-equivalent formulation of permanent income hypothesis, Hall (1978). These findings are often attributed to households' inability to borrow completely against expected future labor income. This paper is a theoretical investigation of optimal consumption behavior under risk aversion, random income fluctuations, and borrowing restrictions. Our principle objective is to establish the existence and to investigate the properties of the stationary probability distribution which characterizes the asymptotic behavior of consumption under these conditions.

Keywords: Permanent income hypothesis; optimal consumption behavior (search for similar items in EconPapers)
Pages: 24 pages
Date: 1984-05, Revised 1985-07
Note: CFP 689.
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Citations: View citations in EconPapers (2)

Published in Economic Review (June 1987), 28(2): 339-351

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