Consumption, Liquidity Constraints and Asset Accumulation in the Presence of Random Income Fluctuations


Publication Date: May 1984

Revision Date: July 1985

Pages: 24


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