economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...

, a liquidity constraint is a form of imperfection in the

capital market A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers ...

which imposes a limit on the amount an individual can borrow, or an alteration in the

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, 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 Economic theories of intertemporal consumption seek to explain people's preferences in relation to consumption (economics), consumption and saving over the course of their lives. The earliest work on the subject was by Irving Fisher and Roy Harrod ...

. 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.

Mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...

lending is the cheapest way of an individual borrowing money, but is only available to people with enough savings to buy property. Because the loan is secured on a house or other property, it is only accessible to particular individuals (those who have enough savings to put down a down payment). Other forms of credit, like unsecured loans, credit cards and

loan shark A loan shark is a person who offers loans at Usury, extremely high or illegal interest rates, has strict terms of debt collection, collection, and generally operates criminal, outside the law, often using the threat of violence or other illegal, ...

s, have progressively higher interest rates, and are used more by poorer people.

References

{{econ-stub Intertemporal economics

See also

References