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Consumption and Liquidity Constraints in Australia and East Asia: Does Financial Integration Matter?

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  • Gordon de Brouwer

    (Reserve Bank of Australia)

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    Abstract

    One of the recurring themes in the literature on financial systems is whether financial integration – that is, openness in the domestic and international financial system – has real, structural economic effects. This paper examines the effect of financial openness on the consumption of non-durables in Australia and selected East Asian economies. A range of variables, some of which explicitly represent financial regulation, are used to proxy the shadow price of the liquidity constraint. Non-durable consumption in Hong Kong, Japan, Korea, Singapore, Taiwan and Thailand can be modelled as the outcome of constrained optimisation, in some cases with time-varying real interest rates and demographic change, while that in Australia is liquidity unconstrained, at least from the 1980s. The constraint appears constant but very weak in Hong Kong and declining in Singapore, consistent with the extent and timing of domestic and international financial reforms in these economies. It appears unchanged for Japan and Korea. For Taiwan and Thailand, there is strong evidence that domestic financial regulation and control have constrained the intertemporal optimisation of consumption, although the constraint may be expected to unwind with recent liberalisation. The experience of Australia and the selected East Asian economies suggests that the liberalisation of the capital account, combined with deregulation and expansion of the domestic financial sector, eases the constraints on consumption smoothing. Financial integration does matter. The experience of these countries also indicates that there is no simple connection between the openess of a country’s financial system and its saving and investment performance.

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    File URL: http://www.rba.gov.au/publications/rdp/1996/pdf/rdp9602.pdf
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    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9602.

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    Date of creation: May 1996
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    Handle: RePEc:rba:rbardp:rdp9602

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    1. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
    2. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
    3. Fry, M.J., 1995. "Financial Development in Asia: Some Analytical Issues," Papers 95-01, University of Birmingham - International Financial Group.
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    7. Shintani Mototsugu, 1994. "Cointegration and Tests of the Permanent Income Hypothesis: Japanese Evidence with International Comparisons," Journal of the Japanese and International Economies, Elsevier, vol. 8(2), pages 144-172, June.
    8. Gali, Jordi, 1990. "Finite horizons, life-cycle savings, and time-series evidence on consumption," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 433-452, December.
    9. Muellbauer, John, 1994. "The Assessment: Consumer Expenditure," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 1-41, Summer.
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    14. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-79, July.
    15. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
    16. 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.
    17. Ashok K. Lahiri, 1989. "Dynamics of Asian Savings: The Role of Growth and Age Structure," IMF Staff Papers, Palgrave Macmillan, vol. 36(1), pages 228-261, March.
    18. Donald Cox & Tullio Japelli, 1993. "The Effect Of Borrowing Constraints On Consumer Liabilities," Boston College Working Papers in Economics 228, Boston College Department of Economics.
    19. Charles R. Nelson, 1985. "A Reappraisal of Recent Tests of the Permanent Income Hypothesis," NBER Working Papers 1687, National Bureau of Economic Research, Inc.
    20. repec:fth:harver:1435 is not listed on IDEAS
    21. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
    22. Lattimore, Ralph, 1994. "Australian Consumption and Saving," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 54-70, Summer.
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    25. Clarida, Richard H, 1991. "Aggregate Stochastic Implications of the Life Cycle Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 851-67, August.
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