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Consumption with liquidity constraints: An analytical characterization

Holm, Martin Blomhoff
Journal article, Peer reviewed
Accepted version
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URI
http://hdl.handle.net/11250/2501386
Date
2018
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Original version
Economics Letters. 2018, 167(June), 40-42.   https://doi.org/10.1016/j.econlet.2018.03.004
Abstract
How do liquidity constraints affect households? This is a well-researched subject with remarkably few theoretical results. This paper bridges this gap by providing a closed form expression for consumption with liquidity constraints for a wide class of utility functions (HARA). Using this expression, I prove that the consumption function is strictly concave in wealth if a relevant liquidity constraint exists. Moreover, households respond to a tightening of the liquidity constraint by reducing consumption, becoming more sensitive to wealth changes, and having a “more” concave consumption function in wealth. These results thus provide theoretical underpinnings for how contractions in credit supply affect households
Publisher
Elsevier
Journal
Economics Letters

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