Consumption, Liquidity Constraints and Asset Accumulation in the Presence of Random Income FluctuationsAuthor(s):
Publication Date: May 1984
Revision Date: July 1985
Recent empirical research, Flavin (1981), Hagashi (1982), has rejected the certainty-equivalent formulation of permanent income hypothesis, Hall (1978). These ﬁndings are often attributed to households’ inability to borrow completely against expected future labor income. This paper is a theoretical investigation of optimal consumption behavior under risk aversion, random income fluctuations, and borrowing restrictions. Our principle objective is to establish the existence and to investigate the properties of the stationary probability distribution which characterizes the asymptotic behavior of consumption under these conditions.
Permanent income hypothesis, Optimal consumption behavior
JEL Classification Codes: 023
See CFP: 689