Liquidity constrained markets versus debt constrained markets

Timothy J. Kehoe, David K. Levine

Research output: Contribution to journalArticlepeer-review

84 Scopus citations

Abstract

This paper compares two different models in a common environment. The first model has liquidity constraints in that consumers save a single asset that they cannot sell short. The second model has debt constraints in that consumers cannot borrow so much that they would want to default, but is otherwise a standard complete markets model. Both models share the features that individuals are unable to completely insure against idiosyncratic shocks and that interest rates are lower than subjective discount rates. In a stochastic environment, the two models have quite different dynamic properties, with the debt constrained model exhibiting simple stochastic steady states, while the liquidity constrained model has greater persistence of shocks.

Original languageEnglish (US)
Pages (from-to)575-598
Number of pages24
JournalEconometrica
Volume69
Issue number3
DOIs
StatePublished - 2001

Keywords

  • Collateral
  • Contract enforcement
  • Debt constraint
  • Incomplete markets
  • Liquidity constraint
  • Participation constraint

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