Smoothing with Liquid and Illiquid Assets

21 Pages Posted: 25 Aug 2003 Last revised: 23 Sep 2018

Date Written: March 1, 2003


A quantitative examination of the demand for liquid assets arising from consumption smoothing motives reveals that such demand is very low. Consumers faced with income streams calibrated to match income and unemployment data and returns and transactions costs calibrated to match US Treasury Bill data almost exclusively buy and hold illiquid long term assets even though the return premium on long term assets is quite small. This is because, with standard preferences, savings are highly persistent even when risky income is not. In the calibrated model, the first order autocorrelation of savings is an order of magnitude larger than that of income.

Keywords: liquidity, consumption smoothing, portfolio choice, savings

JEL Classification: E0, E2, G1, G2

Suggested Citation

Eisfeldt, Andrea L., Smoothing with Liquid and Illiquid Assets (March 1, 2003). Journal of Monetary Economics, Vol. 54, No. 1, 2007, Available at SSRN: or

Andrea L. Eisfeldt (Contact Author)

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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