Research Discussion Papers, Bank of Finland
Consumption and Uncertain Access to the Asset Market
Abstract: This paper presents a new approach to modelling credit
restrictions by considering uncertain access to the asset market. The asset
market and the stochastic process governing access are considered fully
exogenous and independent of income. The model generates stable debt
trajectories for a broader array of interest rate levels than the one
corresponding to the agentís rate of time preference. The agent exhibits
excess sensitivity of consumption to current period income, even for low
probabilities of constraints. Because this sensitivity is inversely related
to the maturity of debt contracts, the availability of long-term debt
contracts reduces the income-sensitivity of consumption. A very tractable
approximative Euler equation for the model is presented.
Keywords: consumption; liquidity constraints; permanent income hypothesis; (follow links to similar papers)
36 pages, December 11, 2000
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