Liquidity Constraints and the Permanent Income Hypothesis: Pseudo Panel Estimation with German Consumption Survey Data
AbstractThis paper empirically investigates the relevance of liquidity constraints and excess sensitivity in intertemporal household consumption. Using a pseudo panel that has been constructed on rich German consumption survey data, we estimate the consumption responses to permanent and transitory income shocks, as well as the presence of excess sensitivity to anticipated income changes. A switching regression approach with unknown sample separation is applied to identify the two regimes whether to be liquidity constrained or not. The results are used to test whether liquidity constraints affect the validity of the permanent income hypothesis. For households in the constrained regime, reactions to changes in transitory income are found to be significantly greater than for households in the unconstrained regime. Furthermore, we provide evidence for excess sensitivity to anticipated income changes for households in the constrained regime if total consumption, durable as well as non-durable, is considered.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1231.
Length: 34 p.
Date of creation: 2012
Date of revision:
Liquidity constraints; excess sensitivity; household consumption; switching regression; permanent income hypothesis;
Find related papers by JEL classification:
- C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-08-23 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
- Greg Kaplan & Giovanni L. Violante, 2009.
"How Much Consumption Insurance Beyond Self-Insurance?,"
NBER Working Papers
15553, National Bureau of Economic Research, Inc.
- Greg Kaplan & Giovanni L. Violante, 2010. "How Much Consumption Insurance beyond Self-Insurance?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 53-87, October.
- Orazio Attanasio & Nicola Pavoni, 2008.
"Risk Sharing in Private Information Models with Asset Accumulation: Explaining the Excess Smoothness of Consumption,"
Carlo Alberto Notebooks
103, Collegio Carlo Alberto.
- Orazio P. Attanasio & Nicola Pavoni, 2011. "Risk Sharing in Private Information Models With Asset Accumulation: Explaining the Excess Smoothness of Consumption," Econometrica, Econometric Society, vol. 79(4), pages 1027-1068, 07.
- Orazio Attanasio & Nicola Pavoni, 2007. "Risk Sharing in Private Information Models with Asset Accumulation: Explaining the Excess Smoothness of Consumption," NBER Working Papers 12994, National Bureau of Economic Research, Inc.
- Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
- Garner, Thesia I. & Verbrugge, Randal, 2009.
"Reconciling user costs and rental equivalence: Evidence from the US consumer expenditure survey,"
Journal of Housing Economics,
Elsevier, vol. 18(3), pages 172-192, September.
- Randal Verbrugge & Thesia I. Garner, 2009. "Reconciling User Costs and Rental Equivalence: Evidence from the U.S. Consumer Expenditure Survey," Working Papers 427, U.S. Bureau of Labor Statistics.
- Richard Blundell & Luigi Pistaferri & Ian Preston, 2008.
"Consumption Inequality and Partial Insurance,"
American Economic Review,
American Economic Association, vol. 98(5), pages 1887-1921, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bibliothek).
If references are entirely missing, you can add them using this form.