Journal of Political Economy Vol. 97 No. 2 1989
Consumption and Liquidity Constraints: An Empirical Investigation
Abstract
Several recent studies have suggested that empirical rejections of the permanent income/life cycle model may be due to the existence of liquidity constraints. This paper tests the permanent income hypothesis against the alternative hypothesis that consumers optimize subject to a well-specified sequence of borrowing constraints. Implications for consumption in the presence of borrowing constraints are derived and then tested using time-series/cross-section data on families from the Panel Study of Income Dynamics. The results generally support the hypothesis that an inability to borrow against future labor income affects the consumption of a significant portion of the population.
- DOI
- 10.1086/261605
- Volume
- 97
- Issue
- 2
- Pages
- 305-346
- Language
- en
- Sources
- openalex crossref