This paper develops and tests a new set of stochastic implications of optimal consumption behavior in the presence of borrowing constraints. In a departure from previous models, the theory shows that liquidity constraints imply a distinctive intertemporal relationship between durable and...

This paper develops and tests a new set of stochastic implications of optimal consumption behavior in the presence of borrowing constraints. In a departure from previous models, the theory shows that liquidity constraints imply a distinctive intertemporal relationship between durable and...

The classic Arrow-Debreu (1954) general equilibrium model cannot sustain or account for the existence of money. This lacuna arises because each household and firm faces a single budget constraint summarizing revenue and expense in all commodities. Money, a carrier of value between transactions,...