Optimal consumption/investment policies with undiversifiable income risk and liquidity constraints

2000 ◽  
Vol 24 (9) ◽  
pp. 1315-1343 ◽  
Author(s):  
Claus Munk
Keyword(s):  
Liquidity Constraints ◽  
Optimal Consumption ◽  
Income Risk ◽  
Investment Policies

Optimal Consumption and Investment under Time-Varying Liquidity Constraints

2018 ◽  
Vol 54 (4) ◽  
pp. 1643-1681 ◽  
Author(s):  
Seryoong Ahn ◽  
Kyoung Jin Choi ◽  
Byung Hwa Lim
Keyword(s):  
Liquidity Constraints ◽  
Investment Decisions ◽  
Empirical Literature ◽  
Optimal Consumption ◽  
Time Varying ◽  
Optimal Policies ◽  
Income Ratio ◽  
Optimal Consumption And Investment

We study consumption and investment decisions given realistic time-varying constraints on borrowing. We first consider the case where borrowing is constrained by a maximum debt-to-income ratio. We then consider collateral borrowing with a maximum loan-to-value ratio. The resulting implications for optimal policies differ considerably from those obtained in the existing literature based on fixed borrowing limits but are consistent with those documented in the empirical literature.

The Precautionary Saving Model

2017 ◽  
Author(s):  
Tullio Jappelli ◽  
Luigi Pistaferri
Keyword(s):  
Liquidity Constraints ◽  
Precautionary Saving ◽  
Income Risk ◽  
Quadratic Utility ◽  
Excess Sensitivity

The chapter removes the assumption of quadratic utility and examines situations in which consumers respond to income risk by increasing current saving to protect against future shocks to income. This motive for saving is called precautionary saving, and it provides an explanation for some of the empirical findings in the literature, such as the observation that people with more volatile incomes tend to save more than individuals with more stable income patterns. Moreover, it can also explain the excess sensitivity of consumption to expected income changes. Indeed, a model with precautionary saving produces a good many predictions similar to those of the model with liquidity constraints.

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