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- Title
Optimal consumption with time-inconsistent preferences.
- Authors
Liu, Liya; Niu, Yingjie; Wang, Yuanping; Yang, Jinqiang
- Abstract
This paper extends the standard continuous-time buffer-stock savings model with borrowing constraints by introducing time-inconsistent agent preferences. Interestingly, it predicts that time-inconsistent preferences will strengthen the consumption motive, and this makes the agent's borrowing constraints more severe and generates higher MPCs out of liquidity, which provides an alternative explanation for the "excess sensitivity" to liquidity from the perspective of time-inconsistent preferences. Moreover, by incorporating time-inconsistent preferences, our theoretical model also provides support for the empirical evidence of "excess smoothness."
- Subjects
SAVINGS; EXPLANATION; EVIDENCE
- Publication
Economic Theory, 2020, Vol 70, Issue 3, p785
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-019-01228-1