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

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Fumio Hayashi

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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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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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Handle: RePEc:nbr:nberwo:0882

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  1. 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. [Downloadable!] (restricted)
  2. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January. [Downloadable!] (restricted)
  3. Ben S. Bernanke, 1981. "Permanent Income, Liquidity, and Expenditure on Automobiles: Evidence from Panel Data," NBER Working Papers 0756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
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  5. James Tobin, 1956. "Estimation of Relationships for Limited Dependent Variables," Cowles Foundation Discussion Papers 3R, Cowles Foundation, Yale University. [Downloadable!]
  6. Sargent, Thomas J, 1978. "Rational Expectations, Econometric Exogeneity, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 673-700, August. [Downloadable!] (restricted)
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  7. Amemiya, Takeshi, 1973. "Regression Analysis when the Dependent Variable is Truncated Normal," Econometrica, Econometric Society, vol. 41(6), pages 997-1016, November. [Downloadable!] (restricted)
  8. Fumio Hayashi, 1979. "The Permanent Income Hypothesis: Estimation and Testing," Discussion Papers 484, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  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. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
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