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Do Borrowing Constraints Matter? An Analysis of Why the Permanent Income Hypothesis Does Not Apply in Japan

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  • Miki Kohara
  • Charles Yuji Horioka

Abstract

We use micro data on young married households from the Japanese Panel Survey of Consumers in order to analyze the importance of borrowing constraints in Japan. We find (1) that 8 to 15 percent of young married Japanese households are borrowing-constrained, (2) that household assets and the husband's educational attainment are the most important determinants of whether or not a household is borrowing-constrained, and (3) that the Euler equation implication is rejected for both the full sample and for the subsample of unconstrained households. These results suggest that the life cycle/permanent income hypothesis does not apply in Japan and that the presence of borrowing constraints is not the main reason why it does not apply.

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Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0663.

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Date of creation: Jun 2006
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Handle: RePEc:dpr:wpaper:0663

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  1. T. Jappelli & J-S Pischke & N.S. Souleles, 1995. "Testing for Liquidity Constraints in Euler Equations with Complementary Data Sources," Working papers 95-19, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Charles Yuji Horioka, 2006. "The Causes of Japan's 'Lost Decade': The Role of Household Consumption," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0661, Institute of Social and Economic Research, Osaka University.
  3. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 219-34, February.
  4. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(2), pages 305-46, April.
  5. Runkle, David E., 1991. "Liquidity constraints and the permanent-income hypothesis : Evidence from panel data," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(1), pages 73-98, February.
  6. Hayashi, Fumio, 1985. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1083-1113, November.
  7. Midori Wakabayashi & Charles Yuji Horioka, 2005. "Borrowing Constraints and Consumption Behavior in Japan," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0640, Institute of Social and Economic Research, Osaka University.
  8. Ogawa, Kazuo, 1990. "Cyclical variations in liquidity-constrained consumers: Evidence from macro data in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 4(2), pages 173-193, June.
  9. Shibata, Akihisa & Shintani, Mototsugu, 1998. "Capital mobility in the world economy: an alternative test," Journal of International Money and Finance, Elsevier, Elsevier, vol. 17(5), pages 741-756, October.
  10. Jappelli, Tullio & Pistaferri, Luigi, 1997. "Using Subjective Income Expectations to Test for Excess Sensitivity of Consumption to Predicted Income Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1617, C.E.P.R. Discussion Papers.
  11. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  12. repec:fth:pennfi:69 is not listed on IDEAS
  13. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May.
  14. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(3), pages 417-425.
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Cited by:
  1. Charles Yuji Horioka & Shizuko Sekita, 2009. "The Degree of Judicial Enforcement and Credit Markets: Evidence from Japanese Household Panel Data," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0764, Institute of Social and Economic Research, Osaka University.
  2. Ibáñez, Ana María & Moya, Andrés, 2010. "Vulnerability of Victims of Civil Conflicts: Empirical Evidence for the Displaced Population in Colombia," World Development, Elsevier, vol. 38(4), pages 647-663, April.
  3. Hiroshi Morita, 2012. "Expansionary Effect of an Anticipated Fiscal Policy on Consumption in Japan," Global COE Hi-Stat Discussion Paper Series gd11-219, Institute of Economic Research, Hitotsubashi University.
  4. Ana María Ibáñez & Andrés Moya, 2006. "The Impact of Intra-State Conflict on Economic Welfare and Consumption Smoothing: Empirical Evidence for the Displaced Population in Colombia," HiCN Working Papers 23, Households in Conflict Network.
  5. Kurita, Takamitsu, 2010. "Co-breaking, cointegration, and weak exogeneity: Modelling aggregate consumption in Japan," Economic Modelling, Elsevier, vol. 27(2), pages 574-584, March.
  6. Kohei Kubota & Mototsugu Fukushige, 2009. "Rational consumers," Discussion Papers in Economics and Business 09-15, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  7. Charles Yuji Horioka & Shizuka Sekita, 2009. "Are Fast Court Proceedings Good or Bad ? : Evidence from Japanese Household Panel Data," Working Papers, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure 0916, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.

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