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Financial Liberalization and the Permanent Income Hypothesis

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  • Blundell-Wignall, Adrian
  • Browne, Frank
  • Tarditi, Alison
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    Abstract

    This paper addresses the question of whether financial liberalization and innovation have significantly altered consumption behavior by reducing liquidity constraints as capital markets become more flexible. A consumption model, in which the permanent income hypothesis and extreme Keynesian consumption functions are nested as special cases, is the starting point for this analysis. Estimated values for the sensitivity of consumption to current income for different time periods and for several OECD countries are assessed. These results are then compared in the light of their various econometric properties, country-specific liberalization measures, and a variety of proxies reflecting changing liquidity constraints. Copyright 1995 by Blackwell Publishers Ltd and The Victoria University of Manchester

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    Bibliographic Info

    Article provided by University of Manchester in its journal The Manchester School of Economic & Social Studies.

    Volume (Year): 63 (1995)
    Issue (Month): 2 (June)
    Pages: 125-44

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    Handle: RePEc:bla:manch2:v:63:y:1995:i:2:p:125-44

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    Cited by:
    1. Bacchetta, Philippe & Gerlach, Stefan, 1997. "Consumption and credit constraints: International evidence," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 207-238, October.
    2. Guy Debelle & Bruce Preston, 1995. "Consumption, Investment and International Linkages," RBA Research Discussion Papers rdp9512, Reserve Bank of Australia.
    3. Sarantis, Nicholas & Stewart, Chris, 2003. "Liquidity constraints, precautionary saving and aggregate consumption: an international comparison," Economic Modelling, Elsevier, vol. 20(6), pages 1151-1173, December.
    4. Gordon de Brouwer, 1996. "Consumption and Liquidity Constraints in Australia and East Asia: Does Financial Integration Matter?," RBA Research Discussion Papers rdp9602, Reserve Bank of Australia.
    5. Robert Woods, 2004. "Fiscal Stabilisation and EMU," CESifo Working Paper Series 1338, CESifo Group Munich.
    6. L. Pozzi & F. Heylen & M. Dossche, 2002. "Government debt and the excess sensitivity of private consumption to current income: an empirical analysis for OECD countries," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 02/155, Ghent University, Faculty of Economics and Business Administration.
    7. Taylor, Alan M, 2001. "Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price," Econometrica, Econometric Society, vol. 69(2), pages 473-98, March.
    8. G.J. de Bondt, 1999. "Credit Channels and Consumption: European Evidence," DNB Staff Reports (discontinued) 39, Netherlands Central Bank.
    9. Nicolas de Roos & Bill Russell, 1996. "Towards an Understanding of Australia’s Co-movement with Foreign Business Cycles," RBA Research Discussion Papers rdp9607, Reserve Bank of Australia.

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