PRECAUTIONARY SAVINGS UNDER LIQUIDITY CONSTRAINTS - A DECOMPOSITION

This paper investigates the effects of liquidity constraints on consum ption/saving by separating precautionary saving caused by liquidity co nstrains (PS2) from the conventional precautionary saving made against income uncertainty (PS1). It is proved that there exists a unique lev el of wealth below which PS2 is strictly positive and above which liqu idity constraints have no effects at all. The numerical simulations sh ow that PS2 is quantitatively important, depending on age and the leve l of wealth. Some empirical findings in the literature cannot be expla ined by PS1 alone but are consistent with the model in which PS2 is pr esent.