scholarly journals Liquidity Constraints and Precautionary Saving

10.3386/w8496 ◽  
2001 ◽  
Author(s):  
Christopher Carroll ◽  
Miles Kimball
Keyword(s):  
Liquidity Constraints ◽  
Precautionary Saving

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.

The Buffer Stock Model

2017 ◽  
Author(s):  
Tullio Jappelli ◽  
Luigi Pistaferri
Keyword(s):  
Marginal Utility ◽  
Credit Constraints ◽  
Liquidity Constraints ◽  
Borrowing Constraints ◽  
Precautionary Saving ◽  
Buffer Stock ◽  
Borrowing Constraint ◽  
Stock Model ◽  
Intertemporal Decisions ◽  
Period Model

We analyze models that combine precautionary saving and liquidity constraints to provide a unified, more realistic treatment of intertemporal decisions. We start off with a simple three-period model to illustrate how the expectation of future borrowing constraints can induce precautionary saving even in scenarios in which marginal utility is linear. A more general model that allows liquidity constraints and precautionary saving to interact fully is the buffer stock model, of which there are two versions. One, developed by Deaton (1991), emphasizes the possibility that a prudent and impatient consumer may face credit constraints. The other, by Carroll (1997), features the same type of consumer but allows for the possibility of income falling to zero and so generating a natural borrowing constraint.

scholarly journals Liquidity Constraints and Precautionary Saving

2021 ◽  
pp. 105276
Author(s):  
Christopher D. Carroll ◽  
Martin B. Holm ◽  
Miles S. Kimball
Keyword(s):  
Liquidity Constraints ◽  
Precautionary Saving

scholarly journals Liquidity Constraints of the Middle Class

2019 ◽  
Vol 11 (3) ◽  
pp. 130-155 ◽  
Author(s):  
Jeffrey R. Campbell ◽  
Zvi Hercowitz
Keyword(s):  
Middle Class ◽  
Liquidity Constraints ◽  
College Education ◽  
Planning Horizon ◽  
Precautionary Saving ◽  
Asset Accumulation ◽  
Survey Of Consumer Finances ◽  
Consumer Finances ◽  
Effective Planning

Existing evidence from US middle class households shows that their MPCs out of tax rebates greatly exceed the PIH’s prediction and are weakly related to their liquid assets. The standard precautionary-saving model predicts the first fact but counterfactu-ally requires MPCs to decrease with liquid wealth. Evidence from the Survey of Consumer Finances indicates widespread saving in anticipation of major expenditures like home purchases and college education. Adding such savings to the standard precautionary-saving model allows it to generate realistic MPCs for households with liquid wealth: the approaching expenditure simultaneously motivates asset accumulation and raises MPCs by shortening the effective planning horizon. (JEL D14, D15, D31, E21, H24, H31)

scholarly journals A Theory of the Consumption Function, With and Without Liquidity Constraints

2001 ◽  
Vol 15 (3) ◽  
pp. 23-45 ◽  
Author(s):  
Christopher D Carroll
Keyword(s):  
Liquidity Constraints ◽  
Original Description ◽  
Precautionary Saving ◽  
Income Risk ◽  
Labor Income Risk ◽  
Marginal Propensity To Consume ◽  
Precautionary Behavior ◽  
Marginal Propensity ◽  
Future Income ◽  
Relationship Of

This paper argues that the modern stochastic consumption model, in which impatient consumers face uninsurable labor income risk, matches Milton Friedman's (1957) original description of the Permanent Income Hypothesis much better than the perfect foresight or certainty equivalent models did. The model can explain the high marginal propensity to consume, the high discount rate on future income, and the important role for precautionary behavior that were all part of Friedman's original framework. The paper also explains the relationship of these questions to the Euler equation literature, and argues that the effects of precautionary saving and liquidity constraints are often virtually indistinguishable.

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