Soft liquidity constraints and precautionary saving

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 22 July 2002

Working Paper no. 158
By Emilio Fernandez-Corugedo

This paper considers the implications for consumption and saving behaviour when households are allowed to borrow, but face penalties which increase with the amount borrowed. It shows that the introduction of this type of constraints (soft liquidity constraints) does not lead to consumers behaving very differently from consumers who face constraints which prevent them from borrowing at any time (hard liquidity constraints). However, when hard constraints are relaxed and become soft, the amount of precautionary saving falls.

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