Liquidity constraint

In economics, a liquidity constraint is a form of imperfection in the capital market which imposes a limit on the amount an individual can borrow, or an alteration in the interest rate they pay. By raising the cost of borrowing or restricting the amount of borrowing, it prevents individuals from fully optimising their behaviour over time, as studied by theories of intertemporal consumption. The liquidity constraint affects the ability of households to transfer resources across time periods, as well as across uncertain states of nature, relative to income.

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