Liquidity Constraints With Endogenous Income

Abstract

This article examines liquidity constraints within the household k intertemporal model with nonseparable consumption and leisure. The model includes wage income in the minimum wealth constraint. We derive an estimable equation for employed households that holds whether or not the family is credit constrained. The formulation enables direct testing for liquidity constraints. Empirical findings using the Panel Study of Income Dynamics strongly support the existence of debt constraints. Credit constrained households have significantly lower levels of consumption, disposable income, saving, and wage rates, a higher average propensity to consume, and smaller labor hours for the spouse but not the head. (JEL D9 1,522)

Why aren't developed countries saving?

“…Hence, over time, each country places less and less weight on the well being of those coming in the future. 12 The di¤erences between 0 and may seem small, but they can be substantial when translated into time preference rates. For U.S., the long-run time preference rate is 36.1 percent higher than its initial (1950) value for both models.…”

“…Note that a value above 1 is to be expected given that we are have not detrended the data 12. Note that the values of 0 and both exceed 1.…”