# Liquidity constraint

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{{Short description|Limiting or increasing the cost of borrowing capital}}
In [economics](/source/economics), a '''liquidity constraint''' is a form of imperfection in the [capital market](/source/capital_market) which imposes a limit on the amount an individual can borrow, or an alteration in the [interest rate](/source/interest_rate) they pay.<ref>{{cite book |last1=Williamson |first1=Stephen D. |title=The New Palgrave Dictionary of Economics |chapter=Liquidity Constraints |chapter-url=https://link.springer.com/referenceworkentry/10.1057%2F978-1-349-95189-5_2438 |website=The New Palgrave Dictionary of Economics |publisher=[Palgrave Macmillan UK](/source/Palgrave_Macmillan_UK) |access-date=26 May 2021 |pages=7912–7919 |language=en |doi=10.1057/978-1-349-95189-5_2438 |date=2018|isbn=978-1-349-95188-8 }}</ref> 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](/source/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.<ref>{{cite journal |last1=Wilcox |first1=James A. |title=Liquidity Constraints on Consumption: The Real Effects of "Real" Lending Policies |journal=Economic Review |date=Fall 1989 |issue=4 |page=39 |url=https://www.frbsf.org/economic-research/files/89-4_39-52.pdf |access-date=26 May 2021 |publisher=[Federal Reserve Bank of San Francisco](/source/Federal_Reserve_Bank_of_San_Francisco)}}</ref><ref>{{cite journal|last1=Hubbard |first1=R. Glenn |last2=Judd |first2=Kenneth L. |url=https://core.ac.uk/download/pdf/6252235.pdf |title=Liquidity Constraints, Fiscal Policy, and Consumption | access-date=26 May 2021|journal=[Brookings Papers on Economic Activity](/source/Brookings_Papers_on_Economic_Activity)|date=1986|issue=1 |pages=1–59 |doi=10.2307/2534413 |jstor=2534413 }}</ref>

'''[Mortgage](/source/Mortgage_loan) 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 loan](/source/loan)s, [credit card](/source/credit_card)s and [loan shark](/source/loan_shark)s, have progressively higher interest rates, and are used more by poorer people.

== See also ==
* [Finance charge](/source/Finance_charge)

==References==
{{Reflist}}

{{econ-stub}}

Category:Intertemporal economics

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