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Are Countries with Official International Restrictions "Liquidity Constrained?"

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  • Karen K. Lewis
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    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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    Bibliographic Info

    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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    Cited by:
    1. Devereux, Michael B. & Min Lee, Khang, 1999. "Endogenous trade policy and the gains from international financial markets," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(1), pages 35-59, February.
    2. Singh, Ajit & Zammit, Ann, 2000. "International Capital Flows: Identifying the Gender Dimension," World Development, Elsevier, vol. 28(7), pages 1249-1268, July.
    3. Singh, Ajit, 1999. "The role of employment and work in poverty eradication and empowerment and advancement of women," MPRA Paper 54923, University Library of Munich, Germany.
    4. Palle Andersen & Ramon Moreno, 2005. "Financial integration: an overview," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation and monetary policy in emerging markets, volume 23, pages 1-8 Bank for International Settlements.
    5. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does financial globalization promote risk sharing?," Journal of Development Economics, Elsevier, vol. 89(2), pages 258-270, July.
    6. Jerome Adda & Jonathan Eaton, 1998. "Borrowing iwth Unobserved Liquidity Constraints: Structural Estimation with an Application to Sovereign Debt," Boston University - Institute for Economic Development, Boston University, Institute for Economic Development 84, Boston University, Institute for Economic Development.
    7. M. Kabir Hassan & Geoffrey M. Ngene & Jung Suk-Yu, 2011. "Credit Default Swaps and Sovereign Debt Markets," NFI Working Papers 2011-WP-03, Indiana State University, Scott College of Business, Networks Financial Institute.

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