Precautionary Saving under Liquidity Constraints: A Decomposition

Credit and risk in rural developing economies

“…The consumption function is concave and similar in shape for both constrained and unconstrained cases. As was found by Xu (1995) in the exogenous h (no zÞ model, conditioning on current levels of x, all households will consume more when they can borrow. Moreover, savings are always higher as a function of x in the liquidity-constrained case, as constrained households will find it optimal to hold greater buffer stocks (Deaton, 1991).…”

“…2 Households must decide in each period how much to consume, invest, and save (or dissave). This paper therefore represents an addition to the consumption-precautionary savings literature, advanced inter alia by Zeldes (1989), Deaton (1991), Xu (1995), and Carroll (1997and Carroll ( , 2001. One insight of this literature is that borrowing constraints induce households to save more in order to smooth their consumption.…”

“…Since lim cÀ!0 lðcÞ ¼ 1, as pointed out by Xu (1995) and Carroll (1997), households would not choose to borrow as x ! g, where g is some limit which depends on h min .…”

Precautionary saving under liquidity constraints: Evidence from rural Pakistan

“…Finally, the results of this study suggest that precautionary saving becomes stronger under liquidity constraints. The existing theoretical and numerical studies demonstrate that the possibility of future binding constraints makes the household accumulate buffer stock [Samwick (2003); Caroll and Kimball (2001); and Xu (1995)]. In this line of research, the presence of liquidity constraints in the standard life cycle model with uncertainty would increase future income risks.…”

Foreign exchange reserves in a credit constrained economy

“…Technically, precautionary saving behavior in response to uncertainly is captured by the convexity of the marginal utility function or a positive third derivative(Leland (1968),Sandmo (1970)). Moreover, recent studies show that existence of liquidity constraints increase precautionary savings(Deaton (1991),Xu(1995), Caroll and Kimball (2001)) Aiyagari (1994). argues that the existence of borrowing constraints may lead to precautionary savings behavior regardless of a positive third derivative.…”