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Are Countries with Official International Restrictions "Liquidity Constrained?"

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Author Info
Karen K. Lewis
Abstract

In this paper, I empirically examine consumption smoothing behavior across a broad group of countries using a unique data set that indicates whether residents in a country face an official government restriction. I then ask whether the ex ante consumption movements among restricted countries differ from those of unrestricted countries. To gauge the departure from standard consumption smoothing, I use the Campbell and Mankiw (1989, 1991) approach of regressing consumption growth on income growth and instrumenting with lagged variables. Interestingly, I find that consumption growth for residents in countries that impose international restrictions has a significantly higher coefficient on income growth than for residents in countries without those restrictions. Thus, a greater proportion of consumers facing international restrictions appear to act as though they are liquidity constrained according to the Campbell and Mankiw approach. I also discuss alternative interpretations that do not depend upon liquidity constraints.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5991.

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Date of creation: Apr 1997
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Publication status: published as European Economic Review, Vol. 41, no. 6 (June 1997): 1070-1109.
Handle: RePEc:nbr:nberwo:5991

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  1. Adda, Jérôme & Eaton, Jonathan, 1998. "Borrowing with unobserved liquidity constraints structural estimation with an application to sovereign debt," CEPREMAP Working Papers (Couverture Orange) 9806, CEPREMAP. [Downloadable!]
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