publication . Article . 1989

Consumption and Liquidity Constraints: An Empirical Investigation

Stephen P. Zeldes;
Open Access
  • Published: 01 Jan 1989 Journal: Journal of Political Economy, volume 97, issue 2 April, pages 305-46
Several recent studies have suggested that empirical rejections of the permanent income/life cycle model may be due to the existence of liquidity constraints. This paper tests the permanent income hypothesis against the alternative hypothesis that consumers optimize subject to a well-specified sequence of borrowing constraints. Implications for consumption in the presence of borrowing constraints are derived and then tested using time-series/cross-section data on families from the Panel Study of Income Dynamics. The results generally support the hypothesis that an inability to borrow against future labor income affects the consumption of a significant portion of...
Medical Subject Headings: social sciences
free text keywords: Permanent income hypothesis, Comprehensive income, Consumption (economics), Alternative hypothesis, Autonomous consumption, Panel Study of Income Dynamics, Natural borrowing limit, Microeconomics, Economics, Consumption function
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