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The Effect of Liquidity Constraints on Consumption: A Cross-Sectional Analysis

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  • Fumio Hayashi

Abstract

This paper examines the effect of liquidity constraints on consumption expenditures using a single-time cross-section data set. A reduced-form equation for consumption is estimated on high-saving households by the Tobit procedure to account for the selectivity bias. Since high-saving households are not likely to be liquidity constrained, the estimated equation is an appropriate description of how desired consumption dictated by the life cycle-permanent income hypothesis is related to the variables available in the cross-section data. When the reduced-form equation is used to predict desired consumption, the gap between desired consumption and measured consumption is most evident for young households.

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File URL: http://www.nber.org/papers/w0882.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0882.

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Date of creation: Apr 1982
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Publication status: published as Hayashi, Fumio. "The Effect of Liquidity Constraints on Consumption: A Cross-Sectional Analysis." Quarterly Journal of Economics, Vol. 1985, No. 1, Feb. 1985, pp. 183-206.
Handle: RePEc:nbr:nberwo:0882

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  1. Levhari, David & Mirman, Leonard J & Zilcha, Itzhak, 1980. "Capital Accumulation under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(3), pages 661-71, October.
  2. Thomas J. Sargent, 1977. "Rational expectations, econometric exogeneity and consumption," Staff Report 25, Federal Reserve Bank of Minneapolis.
  3. Bernanke, Ben S, 1984. "Permanent Income, Liquidity, and Expenditure on Automobiles: Evidence from Panel Data," The Quarterly Journal of Economics, MIT Press, vol. 99(3), pages 587-614, August.
  4. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
  5. Fumio Hayashi, 1979. "The Permanent Income Hypothesis: Estimation and Testing," Discussion Papers 484, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  7. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  8. Amemiya, Takeshi, 1973. "Regression Analysis when the Dependent Variable is Truncated Normal," Econometrica, Econometric Society, vol. 41(6), pages 997-1016, November.
  9. Hakansson, Nils H, 1970. "Optimal Investment and Consumption Strategies Under Risk for a Class of Utility Functions," Econometrica, Econometric Society, vol. 38(5), pages 587-607, September.
  10. James Tobin, 1956. "Estimation of Relationships for Limited Dependent Variables," Cowles Foundation Discussion Papers 3R, Cowles Foundation for Research in Economics, Yale University.
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