Abstract
This thesis explores household savings responses to income shocks in the context of liquidity constraints. Using log and linear specifications, we implement a two stage least squares state and time fixed effect model. The first stage estimates unexpected shocks to household income. The second stage estimates the effects of the income residual on the change in household liquidity. Using the 1996 wave of the Panel Survey of Income Dynamics to split households according to a measure of creditworthiness, we incorporate household-level biennial wealth, income, and demographic measures from the PSID during the period of 1999 to 2009. Three primary findings emerge: 1) we find the savings response of unconstrained and constrained households to be statistically indistinguishable, 2) presumably constrained households dissave in a negative shock environment, and 3) unconstrained households exhibit statistically significant, but muted savings responses in a positive shock environment.