Soft liquidity constraints and precautionary saving

Abstract

The implications for consumption and saving behaviour are explored, when households are allowed to borrow, but face penalties which increase with the amount borrowed. It is shown 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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