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Liquidity Constraints and the Permanent Income Hypothesis: Pseudo Panel Estimation with German Consumption Survey Data

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  • Martin Beznoska
  • Richard Ochmann

Abstract

This 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.

Suggested Citation

  • Martin Beznoska & Richard Ochmann, 2012. "Liquidity Constraints and the Permanent Income Hypothesis: Pseudo Panel Estimation with German Consumption Survey Data," Discussion Papers of DIW Berlin 1231, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1231
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    3. Martin Beznoska & Richard Ochmann, 2013. "The interest elasticity of household savings: a structural approach with German micro data," Empirical Economics, Springer, vol. 45(1), pages 371-399, August.
    4. Ramiz Rahmanov, 2014. "Liquidity Constraints, Loss Aversion, and Myopia: Evidence from Central and Eastern European Countries," William Davidson Institute Working Papers Series wp1082, William Davidson Institute at the University of Michigan.

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    More about this item

    Keywords

    Liquidity constraints; excess sensitivity; household consumption; switching regression; permanent income hypothesis;
    All these keywords.

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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