We analyze the optimal consumption program of an infinitely lived consumer who maximizes the discounted sum of utilities subject to a sequence of budget constraints where both the interest rate and his income are stochastic. We show that if the income and interest rate processes are sufficiently stochastic and the long run average rate of interest is greater than or equal to the discount rate, then consumption eventually grows without bound with probability one. We also establish conditions under which the borrowing constraints must be binding and examine how the income process affects the optimal consumption program. Journal of Economic Literature Classification Number: D91.
- Uncertainty; consumption; permanent income hypothesis
ASJC Scopus subject areas
- Economics and Econometrics