Neng Wang

Optimal consumption and savings with stochastic income and recursive utility

Coauthor(s): Chong Wang, Jinqiang Yang.

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Abstract:
We develop a tractable continuous-time consumption-savings model for a liquidity-constrained agent who faces both permanent and transitory income shocks under incomplete markets. We derive an explicitly-solved consumption function and show that the marginal (certainty equivalent) value of liquidity measures the effects of financial frictions on welfare. We further analytically characterize steady-state target savings and demonstrate that risk aversion and inter-temporal substitution have very different effects on savings and the dispersions of wealth and consumption.

Exact Citation:
Wang, Chong, Neng Wang, and Jinqiang Yang. "Optimal consumption and savings with stochastic income and recursive utility." Columbia Business School, January 2015.
Date: 1 2015