Today in my Macroeconomics lecture, while covering the Real Intertemporal Model with Investment (Chapter 11 of Williamson's Macroeconomics), my professor proponed that a key assumption to not make consumer saving a central choice variable is the existence of perfectly functioning credit markets. This left many students and I slightly confused. Can somebody please help me get a good grasp of this? Thanks!
1 Answer
I did some quick research online and think I understand better. My basic understanding is that credit market imperfections restrict a consumer's capacity to borrow or to lend, thus his or her saving ceases to be a "neutral"/"fully" endogenous variable. (Rather than being a means to an end--maximize lifetime wealth--it becomes more and more of an end in itself?)