Lecture notes
, LECTURE 2: THE DEMAND SIDE
Consumption with credit constraints
- News about an increase in income from y1 to y2 at time t + 1 is announced at
time t:
Excess
sensitivity
C
d PI
a H
t
a
Excess
- If (for example) 50% of households are credit constrained and 50% credit
unconstrained, aggregate consumptionsmoothnes
will be:
s
50%
unconstrai
50%
ned
constraine
d→
Hand to
“Hand-to-mouth” behaviour mouth
- There is evidence that some households simply consume their current income.
∞
1
U t =∑ ¿
i=0
¿¿
- Reasons for this:
- Basic needs
- Impatience
- Credit constraints
- For such households, consumption will simply be equal to current income.
Aggregate consumption and current income
- Consumption of “hand to mouth” households:
HTM
ct = yt
- Consumption of households who follow the PIH:
PIH r
ct = ¿
1+r
r
C 0= ¿
1+ r
, LECTURE 2: THE DEMAND SIDE
Consumption with credit constraints
- News about an increase in income from y1 to y2 at time t + 1 is announced at
time t:
Excess
sensitivity
C
d PI
a H
t
a
Excess
- If (for example) 50% of households are credit constrained and 50% credit
unconstrained, aggregate consumptionsmoothnes
will be:
s
50%
unconstrai
50%
ned
constraine
d→
Hand to
“Hand-to-mouth” behaviour mouth
- There is evidence that some households simply consume their current income.
∞
1
U t =∑ ¿
i=0
¿¿
- Reasons for this:
- Basic needs
- Impatience
- Credit constraints
- For such households, consumption will simply be equal to current income.
Aggregate consumption and current income
- Consumption of “hand to mouth” households:
HTM
ct = yt
- Consumption of households who follow the PIH:
PIH r
ct = ¿
1+r
r
C 0= ¿
1+ r
