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Aggregate Consumption Behaviour and Liquidity Constraints: The Canadian Evidence

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  • Tony S. Wirjanto

Abstract

This paper considers a general permanent-income model in which a fraction of consumers in the economy is liquidity constrained. Consumption growth rate for these individuals is related to the growth rate of their income and the level of real interest rates. The interest-rate coefficient is predicted to be smaller in the presence of liquidity constraints. Empirically, liquidity constraints are found to be important, and the estimated intertemporal elasticity of substitution parameter is much larger than the one obtained by estimating the standard representative agent model. Lastly, there is some evidence of structural changes over the sample period, which are associated with the 1982 recession.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 28 (1995)
Issue (Month): 4b (November)
Pages: 1135-52

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Handle: RePEc:cje:issued:v:28:y:1995:i:4b:p:1135-52

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Postal: Canadian Economics Association Prof. Steven Ambler, Secretary-Treasurer c/o Olivier Lebert, CEA/CJE/CPP Office C.P. 35006, 1221 Fleury Est Montréal, Québec, Canada H2C 3K4
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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. Sydney Ludvigson & Christina H. Paxson, 1997. "Approximation bias in linearized Euler equations," Research Paper 9712, Federal Reserve Bank of New York.
  3. Luis Zambrano Sequín & Matías Riutort & Rafael Muñoz & Juan Carlos Guevara, 1998. "El ahorro privado en Venezuela: Tendencias y determinantes," Research Department Publications 3021, Inter-American Development Bank, Research Department.
  4. Tomas Havranek & Roman Horvath & Zuzana Irsova & Marek Rusnak, 2013. "Cross-Country Heterogeneity in Intertemporal Substitution," William Davidson Institute Working Papers Series wp1056, William Davidson Institute at the University of Michigan.
  5. Henry, O. & Messinis, G. & Olekalns, N., 1999. "Rational Habit Modification: the Role of Credit," Department of Economics - Working Papers Series 729, The University of Melbourne.
  6. 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.

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