This paper develops and tests a new set of stochastic implications of optimal consumption behavior in the presence of borrowing constraints. In a departure from previous models, the theory shows that liquidity constraints imply a distinctive intertemporal relationship between durable and...

Estimated U.S. M1 demand functions appear unstable, regularly "breaking down," over 1960-88 (e.g., missing money, great velocity decline, M1-explosion). The authors propose a money demand function whose arguments include inflation, real income, long-term bond yield and risk, T-bill interest...