Liquidity constraint or credit rationning in Growth models

Dear members,

I would like to know the simplest way to add a liquidity constraint (other than assuming two type of agents: Ricardian vs non Ricardian) in a growth model, in order to reflect the limits of the level of debt so that households can’t “fully adjust” their expenses when a shock hits the economy.

I reckon that a model with Ricardian vs non-Ricardian is superior, but then calibrated the model based on long-run ratios becomes tricky. I do not really know how the variables of interest (such as consumption) split between non-ricardian and Ricardian households.

Thank you.

Best regards

That depends on what you are trying to do. You can have a single agent that faces a liquidity constraint.

I’m trying to assess the impacts of tax (deterministic) shocks on households and government revenues. Is there an easy way to implement this liquidity constraint without adding too much parameters?

Thanks again

Simply follow the literature on occasionally binding constraints.

Hi hipa,

Following @jpfeifer’s advice, you may also want to have a look at models that feature collateral constraints as well as a balanced-growth path. An example is Iacoviello and Neri (2010)

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Oh cool!

Thanks for the reference.