Liquidity Constraints and Intertemporal Consumer Optimization: Theory and Evidence From Durable Goods / Eun Young Chah, Valerie A. Ramey, Ross M. Starr.

By:

Chah, Eun Young

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w3907.Publication details: Cambridge, Mass. National Bureau of Economic Research 1991.Description: 1 online resource: illustrations (black and white)Subject(s):

E21 - Consumption • Saving • Wealth

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Abstract: 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 nondurable good~ consumption. The presence of binding, liquidity constraints are manifested as part of an error correction term from the long-run cointegrating relationship between durables and nondurables. When liquidity constraints are binding, the error correction term will have predictive power for the future change in nondurable consumption. Empirical tests of the implications using aggregate data support the hypothesis that liquidity constraints, rather than rule-of-thumb behavior, best explain the excess sensitivity of consumption to predictable changes in income.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w3907 (Browse shelf(Opens below))	Not For Loan

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November 1991.

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 nondurable good~ consumption. The presence of binding, liquidity constraints are manifested as part of an error correction term from the long-run cointegrating relationship between durables and nondurables. When liquidity constraints are binding, the error correction term will have predictive power for the future change in nondurable consumption. Empirical tests of the implications using aggregate data support the hypothesis that liquidity constraints, rather than rule-of-thumb behavior, best explain the excess sensitivity of consumption to predictable changes in income.