Hostname: page-component-586b7cd67f-l7hp2 Total loading time: 0 Render date: 2024-11-22T22:39:49.396Z Has data issue: false hasContentIssue false
  • English
  • Français

Liquidity constraints and time non-separable preferences

Published online by Cambridge University Press:  17 August 2016

Jérôme Adda  and
Raouf Boucekkine
Jérôme Adda
Affiliation:
INRA CREST and CEPREMAP, France
Raouf Boucekkine
Affiliation:
University Carlos III, Spain
Get access

Summary

We present an intertemporal model of consumption and savings incorporating liquidity constraints and non separable preferences. We solve the problem numerically and characterize the optimal consumption behavior. We explore the traditional puzzles highlighted in the empirical literature as excess smoothness of consumption, its excess sensitivity to current income and its excess persistence. We show that a model with durability and liquidity constraints is able to reproduce some of the stylized facts. Next we show that some of the econometric tests are not robust and can mistake liquidity constraints for habit formation. Hence previous results establishing habit formation on US data should be interpreted with caution.

Résumé

Résumé

Dans cet article, nous présentons un modèle intertemporel de consommation et d’épargne incorporant les contraintes de liquidité et des préférences non-séparables. Nous résolvons le problème numériquement et caractérisons le comportement optimal de consommation. Nous explorons les puzzles traditionnels soulignés dans la littérature empirique comme étant des comportement de lissage de la consommation, une sensibilité au revenu courant et une persistance excessive. Nous montrons qu’un modèle avec persitance et contraintes de liquidité est capable de reproduire certains des faits stylisés. En suit nous montrons que quelques-uns des tests econometriques ne sont pas robustes et peuvent induire en erreur quant aux contraintes de liquidité pour la formation d’habitude. Donc, les résultats établissant la formation d’habitude sur des données US doivent être interprétés avec prudence.

Keywords

D91E21C63D91E21C63
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 62 , Issue 3-4 , 1996 , pp. 377 - 402
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1996 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

(*)

The paper was written while the first author was visiting Boston University. We are grateful for comments by Russ Cooper, Simon Gilchrist, Pierre Malgrange and participants in seminars at CEPREMAP, Université Catholique de Louvain-la-Neuve, INSEE and INRA-Rennes and two referees. The usual disclaimers applies.

References

Boldrin, M., Christiano, L.J., and Fisher, J.D. [1994], Habit persistence and the equity premium: Implications for business cycle analysis, mimeo, Northwestern University.Google Scholar
Boucekkine, R. [1994], Monte Carlo experimentation for large scale forward-looking economic models, in Grassman, J. and Straten, G.V. (eds.), Predictability and Nonlinear Modelling in Natural Sciences and Economics, Dordrecht, Kluwer Academic Publishers, pp. 600–601.Google Scholar
Boucekkine, R. [1995], An alternative methodology for solving nonlinear forward-looking models, Journal of Economic Dynamics and Control, 19 (4), pp. 711–734.Google Scholar
Campbell, J. and Mankiw, G. [1989], Consumption, income and interest rates: Reinterpreting the time series evidence, in Blanchard, Olivier and Fischer, Stanley (ed.), Nber Macroeconomic Annual 1989, pp. 1–50, Chicago, Chicago University Press.Google Scholar
Campbell, J.Y. and Cochrane, J.H. [1994], By Force of habit: A consumption-based explanation of aggregate stock market behavior, mimeo, Harvard University.Google Scholar
Christiano, L., Eichenbaum, M. and Marshall, D.M. [1991], The permanent income hypothesis revisited, Econometrica, 59(2), pp. 371–396.Google Scholar
De La Croix, D. and Fagnart, J.-F. [1995], Underemployment of production factors in a forward-looking model, Labour Economics, 2(1), pp. 131–160.Google Scholar
Deaton, A. [1987], Life cycle models of consumption: Is the evidence consistent with the theory?, in Bewley, Truman F. (ed.), Advances in Econometrics: Fifth World Congress, volume 2, Cambridge University Press, pp. 1–50.Google Scholar
Deaton, A. [1991], Savings and liquidity constraints, Econometrica, 59(5), pp. 1221–1248.Google Scholar
Deaton, A. and Paxson, C. [1994]. Intertemporal choice and inequality, Journal of Political Economy, 102(3), pp. 437–467.Google Scholar
Den Haan, W.J. and Marcet, A. [1994]. Accuracy in simulations, Review of Economic Studies, 61(1), pp. 3–17.Google Scholar
Dunn, K.B. and Singleton, K. [1986], Modelling the term structure of interest rates under non separable utility and durability of goods, Journal of Financial Economics, 17(1), pp. 27–55.Google Scholar
Dynan, K.E. [1993], How prudent are consumers? Journal of Political Economy, 101(6), pp. 1104–1113.Google Scholar
Eichenbaum, M. and Hansen, L.P. [1990], Estimating models with intertemporal substitution using aggregate time series data, Journal of Business and Economic Statistics, 8(1), pp. 53–69.Google Scholar
Ferson, W.E. and Constantinides, G.M. [1991], Habit persistence and durability in aggregate consumption, Journal of Financial Economics, 29(2), pp. 199–240.Google Scholar
Fisher, P. [1992], Rational Expectations in Macroeconomic Models, London, Kluwer Academic Publishers.Google Scholar
Flavin, M. [1985], Excess sensitivity of consumption to current income: Liquidity constraints or myopa?, Canadian Journal of Economics, 18(1), pp. 177–136.Google Scholar
Gagnon, J. [1990], Solving the stochastic growth model by deterministic extended path, Journal of Business and Economic Statistics, 8(1), pp. 35–36.Google Scholar
Gali, J. [1991], Budget constraints and time-series evidence on consumption, American Economic Review, 81(5), pp. 1238–1253.Google Scholar
Garcia, R., Lusardi, A., and Ng, S. [1995], Excess sensitivity and asymmetries in consumption: An empirical investigation, mimeo, Université de Montréal.Google Scholar
Hall, R. and Mishkin, F. [1982], The sensitivity of consumption to transitory income: Estimates from panel data on household, Econometrica, 50(2), pp. 461–481.Google Scholar
Hall, R.E. [1978], Stochastic implications of the life cycle – Permanent income hypothesis: Theory and evidence, Journal of Political Economy, 86(6), pp. 971–987.Google Scholar
Hayashi, F. [1985], The permanent income hypothesis and consumption durability: Analysis based on Japanese panel data, Quarterly Journal of Economics, 100(4), pp. 1083–1113.Google Scholar
Heaton, J. [1993], The interaction between time-nonseparable preferences and time aggregation, Econometrica, 55(2), pp. 553–557.Google Scholar
Jappelli, T. Pischke, J.-S., and Souleles, N. [1995], Testing for liquidity constraints in euler equations with complementary data sources, mimeo, MIT.Google Scholar
Laffargue, J. [1990], Résolution d’un modèle à anticipations rationnelles, Annales d’Economic et de Statistique, 17(1), pp. 97–119.Google Scholar
Lopez-Salido, D.J. [1995], Time non-separabilities in preferences: A household data analysis, mimeo, CEMFI Madrid.Google Scholar
Mariger, R.P. [1987], A life cycle consumption model with liquidity constraints: Theory and empirical results, Econometrica, 55(3), pp. 553–557.Google Scholar
Muellbauer, J. [1988], Habits, rationality and myopa in the life cycle consumption function, Annales d’Economic et de Statistique, 9(9), pp. 47–70.Google Scholar
Pollak, R.A. [1969], Conditional demand functions and consumption theory, Quarterly Journal of Economics, 83(1), pp. 423–433.Google Scholar
Quah, D. [1990], Permanent and transitory movements in labor income: An explanation for “excess smoothness” in consumption, Journal of Political Economy, 98(3), pp. 449–475.Google Scholar
Zeldes, S. [1989a)], Optimal Consumption with Stochastic income: Deviations from certainty equivalence, Quarterly Journal of Economics, 104(2), pp. 275–298.Google Scholar
Zeldes, S.P. [1989b], Consumption and liquidity constraints: An empirical investigation, Journal of Political Economy, 97(2), pp. 305–346.Google Scholar