Central bank research hub - Papers by Martin Blomhoff Holm
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Research hub papers by author Martin Blomhoff HolmenOn the concavity of the consumption function with liquidity constraints
http://static.norges-bank.no/pages/105490/Working_Paper_14_16.pdf
Central Bank of Norway (Norges Bank) Working Papers by Martin Blomhoff HolmOn the concavity of the consumption function with liquidity constraints2016-09-22T17:36:59ZCarroll and Kimball (1996) prove that the consumption function is concave if infinitely-lived risk-averse households have a utility function which exhibits Hyperbolic Absolute Risk Aversion (HARA), face income uncertainty, and are prudent. However, the empirical evidence is inconclusive about the importance of income uncertainty for households. On the other hand, empirical results suggest that liquidity and liquidity constraints are important determinants of household behavior. In this paper, I prove that the consumption function is strictly concave in wealth for infinitelylived risk-averse households with a utility function of the HARA class if there exists a liquidity constraint which binds for some level of wealth. This result is independent of prudence. Furthermore, the introduction of a liquidity constraint always reduces consumption and increases the marginal propensity to consume out of wealth.On the concavity of the consumption function with liquidity constraintsAbstracthttp://www.norges-bank.no/en/Published/Papers/Working-Papers/2016/142016/Full texthttp://static.norges-bank.no/pages/105490/Working_Paper_14_16.pdfMartin Blomhoff HolmMartin Blomhoff Holm2016-09-22Central Bank of Norway Working PapersD11D52D91