Determinants of consumption smoothing
AbstractAs is generally acknowledged, the failure of the perfect credit markets assumption underlying the permanent income hypothesis may be responsible for low consumption smoothing and observed excess sensitivity of consumption to current income. The economic literature puts forward a number of potential determinants of liquidity constraints. In this paper we investigate the relevance of these determinants by looking at their impact on household consumption smoothing. Applying a Kalman filter to a state-space version of our model, we find that excess sensitivity in the US is higher in recessions and depends positively on government debt and negatively on financial liberalization.
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Bibliographic InfoPaper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 04/231.
Length: 29 pages
Date of creation: Feb 2004
Date of revision:
Private consumption; liquidity constraints; consumption smoothing; excess sensitivity; Kalman filter; state-space models.;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-03-14 (All new papers)
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