The authors propose a method to test for liquidity constraints that relies on using the within period marginal rate of substitution condition as a benchmark to evaluate the intertemporal Euler equation. If spot markets for nondurable goods exist but financial markets are imperfect, the comparison of first-order conditions involving the relevant spot and intertemporal prices can be used to detect the imperfection. The authors apply their methodology to a large sample of U.S. households, allowing for a general nonseparable preference structure. Their estimates do not indicate the presence of liquidity constraints, with the possible exception of young households. Copyright 1996 by The Econometric Society.
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Article provided by Econometric Society in its journal Econometrica.
Volume (Year): 64 (1996) Issue (Month): 5 (September) Pages: 1151-81 Download reference. The following formats are available: HTML
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