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Liquidity Constraints and Precautionary Saving

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Author Info
Christopher D Carroll
Miles S Kimball

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Abstract

Economists working with numerical solutions to the optimal consumption/saving problem under uncertainty have long known that there are quantitatively important interactions between liquidity constraints and precautionary saving behavior This paper provides the analytical basis for those interactions First we explain why the introduction of a liquidity constraint increases the precautionary saving motive around levels of wealth where the constraint becomes binding Secondwe provide a rigorous basis for the oft-noted similarity between the effects of introducing uncertainty and introducing constraints by showing that in both cases the effects spring from the concavity in the consumption function which either uncertainty or constraints can induce We further show that consumption function concavity once created propagates back to consumption functions in prior periods Finally our most surprising result is that the introduction of additional constraints beyond the first one or the introduction of additional risks beyond a first risk can actually reduce the precautionary saving motive because the new constraint or risk can ‘hide?the effects of the preexisting constraints or risks

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Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 455.

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Date of creation: Aug 2001
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Handle: RePEc:jhu:papers:455

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, With and Without Liquidity Constraints (Expanded Version)," NBER Working Papers 8387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January. [Downloadable!] (restricted)
    Other versions:
  3. Besley, Timothy, 1995. "Savings, credit and insurance," Handbook of Development Economics, in: Hollis Chenery† & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 36, pages 2123-2207 Elsevier. [Downloadable!] (restricted)
    Other versions:
  4. Emilio Fernandez-Corugedo, . "Soft liquidity constraints and precautionary saving," Bank of England working papers 158, Bank of England. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David Joulfaian, 2006. "Inheritance and Saving," NBER Working Papers 12569, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Kelly, Clare & Lanot, Gauthier, 2003. "Analytical Results For A Model Of Periodic Consumption," The Warwick Economics Research Paper Series (TWERPS) 673, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
  3. Travaglini Giuseppe, 2008. "An exact consumption rule with liquidity constraints and stochastic income," Economics Bulletin, Economics Bulletin, vol. 5(6), pages 1-9. [Downloadable!]
  4. Jeong-Joon Lee & Yasuyuki Sawada, 2005. "Precautionary Saving under LiquidityConstraints: Evidence from Rural Pakistan," CIRJE F-Series CIRJE-F-377, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  5. Emilio Fernandez-Corugedo & Simon Price, . "Financial liberalisation and consumers' expenditure: 'FLIB' re-examined," Bank of England working papers 157, Bank of England. [Downloadable!]
  6. Helge Braun & Winfried Koeniger, 2007. "On the role of market insurance in a dynamic model," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(1), pages 61-90, June. [Downloadable!] (restricted)
    Other versions:
  7. Harounan Kazianga & Christopher Udry, 2004. "Consumption Smoothing? Livestock, Insurance and Drought in Rural Burkina Faso," Working Papers 898, Economic Growth Center, Yale University. [Downloadable!]
    Other versions:
  8. Mark Huggett, 2001. "Precautionary Wealth Accumulation," Working Papers gueconwpa~01-01-13, Georgetown University, Department of Economics. [Downloadable!]
    Other versions:
  9. James Feigenbaum & Geng Li, 2008. "Lifecycle Dynamics of Income Uncertainty and Consumption," Working Papers 360, University of Pittsburgh, Department of Economics, revised Jul 2008. [Downloadable!]
    Other versions:
  10. Andrew Benito & Haroon Mumtaz, . "Consumption excess sensitivity, liquidity constraints and the collateral role of housing," Bank of England working papers 306, Bank of England. [Downloadable!]
  11. Paul Hiebert & Massimo Rostagno & Javier J. Perez, 2002. "Debt reduction and automatic stabilisation," Working Paper Series 189, European Central Bank. [Downloadable!]
    Other versions:
  12. William N. Goetzmann & Massimo Massa & Andrei Simonov, 2004. "Portfolio Diversification and City Agglomeration," NBER Working Papers 10343, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. James Feigenbaum, 2006. "Precautionary Saving Unfettered," Working Papers 227, University of Pittsburgh, Department of Economics, revised Jan 2006. [Downloadable!]
    Other versions:
  14. James Feigenbaum, 2005. "Heterogeneity vs Uncertainty in Anticipation of a Borrowing Constraint," Working Papers 230, University of Pittsburgh, Department of Economics, revised Jan 2005. [Downloadable!]
  15. Jonathan Parker & Bruce Preston, 2002. "Precautionary Saving and Consumption Fluctuations," NBER Working Papers 9196, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  16. Christopher D. Carroll & Miles S. Kimball, 2006. "Precautionary Saving and Precautionary Wealth," Economics Working Paper Archive 530, The Johns Hopkins University,Department of Economics. [Downloadable!]
  17. Philip Arestis, Elias Karakitsos, 2003. "How Long Can the U.S. Consumers Carry the Economy on Their Shoulders?," Economics Working Paper Archive 380, Levy Economics Institute, The. [Downloadable!]
    Other versions:
  18. Makoto Nirei, 2006. "Quantifying Borrowing Constraints and Precautionary Savings," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 353-363, April. [Downloadable!] (restricted)
  19. Emilio Fernandez-Corugedo, . "Soft liquidity constraints and precautionary saving," Bank of England working papers 158, Bank of England. [Downloadable!]
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