Autore
Patel, Mrudula

Titolo
Optimal life cycle saving with borrowing constraints: a graphical solution
Periodico
European University Institute of Badia Fiesolana (Fi). Department of Economics - Working papers
Anno: 1990 - Fascicolo: 18 - Pagina iniziale: 1 - Pagina finale: 36

As in the orthodox life-cycle theory of consumption and saving behaviour, it is assumed that there is no uncertainty and an additively separable intertemporal utility function. In addition to the usual life-time budget constraint, the consumer is assumed to face upper bounds at each date on the amount that can be borrowed. For special families of utility functions — notably those in the HARA class — it is possible to adapt a simple graphical technique due to Tobin (1975) in order to determine which borrowing constraints bind. As in Mariger (1987), the main effect of binding borrowing constraints turns out to be like a shortening of the planning horizon. It follows that current responses to all wealth, income, and interest rate changes before the time at which there is next a binding borrowing constraint are limited to those that would occur if the planning horizon really were truncated at the time of the constraint. For consumers who are either credit constrained already, or else expect that they might be so in the near future, this helps to explain why the marginal propensity to consume out of current wealth, temporary changes in income, or windfalls can be much larger than the standard life-cycle theory would suggest. But for consumers who are far away from any binding borrowing constraint, the standard life-cycle model can be expected to be a good approximation.



Testo completo: http://hdl.handle.net/1814/357

Esportazione dati in Refworks (solo per utenti abilitati)