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Consumption and Liquidity Constraints: An Empirical Investigation

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Zeldes, Stephen P

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Abstract

Several recent studies have suggested that empirical rejections of the permanent income/life cycle model may be due to the existence of liquidity constraints. This paper tests the permanent income hypothesis against the alternative hypothesis that consumers optimize subject to a well-specified sequence of borrowing constraints. Implications for consumption in the presence of borrowing constraints are derived and then tested using time-series/cross-section data on families from the Panel Study of Income Dynamics. The results generally support the hypothesis that an inability to borrow against future labor income affects the consumption of a significant portion of the population. Copyright 1989 by University of Chicago Press.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 97 (1989)
Issue (Month): 2 (April)
Pages: 305-46
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Handle: RePEc:ucp:jpolec:v:97:y:1989:i:2:p:305-46

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