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How Important Are Liquidity Constraints for Canadian Households? Evidence from Micro-Data

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  • Umar Faruqui
  • Samah Torchani
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    Abstract

    Using a unique micro-dataset containing real and financial information on Canadian households for 2000–07, the authors address two questions: (1) What is the proportion of households whose consumption displays excess sensitivity to income, and who are likely liquidity constrained? (2) Do house prices affect the ability of Canadian households to smooth their consumption? The authors find that, on average (over the 2000–07 period), about 23 per cent of households in Canada were constrained. Their results suggest that young households with fewer liquid assets, higher education and lower home equity, as well as those that are unmarried, are more likely to be liquidity constrained than other households. The authors’ results also suggest that larger housing equity tends to facilitate consumption smoothing for households in Canada. This provides empirical evidence of a collateral channel linking house prices and consumption.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2012/12/dp2012-09.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Discussion Papers with number 12-9.

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    Length: 27 pages
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:bca:bocadp:12-9

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    Keywords: Economic models; Sectoral balance sheet;

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    1. Runkle, David E., 1991. "Liquidity constraints and the permanent-income hypothesis : Evidence from panel data," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 73-98, February.
    2. John Y. Campbell & Joao F. Cocco, 2004. "How do house prices affect consumption? Evidence from micro data," 2004 Meeting Papers 304, Society for Economic Dynamics.
    3. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
    4. Benito, Andrew & Mumtaz, Haroon, 2009. "Excess Sensitivity, Liquidity Constraints, And The Collateral Role Of Housing," Macroeconomic Dynamics, Cambridge University Press, vol. 13(03), pages 305-326, June.
    5. Garcia, R. & Lusardi, A. & Ng, S., 1995. "Excess Sensitivity and Asymmetries in Consumption: an Empirical Investigation," Cahiers de recherche 9511, Universite de Montreal, Departement de sciences economiques.
    6. Orazio Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2005. "Consumption, house prices and expectations," Bank of England working papers 271, Bank of England.
    7. Lise Pichette, 2004. "Are Wealth Effects Important for Canada," Bank of Canada Review, Bank of Canada, vol. 2004(Spring), pages 29-35.
    8. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
    9. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
    10. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
    11. Richard Disney & John Gathergood, . "House Price Volatility and Household Indebtedness in the United States and the United Kingdom," Discussion Papers 09/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    12. Charles Grant, 2007. "Estimating credit constraints among US households," Oxford Economic Papers, Oxford University Press, vol. 59(4), pages 583-605, October.
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