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Aggregate Consumption Behavior and Liquidity Constraints: The Canadian Evidence

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Author Info

  • Wirjanto, T.S.

Abstract

This paper considers a general permanent-income model in which a fraction of consumers in the economy is liquidity constrained. Consumption growth rate for these individuals is related to the growth rate of their income and the level of real interest rates. The interest-rate coefficient is predicted to be smaller in the presence of liquidity constraints. Empirically, liquidity constraints are found to be important, and the estimated intertemporal elasticity of substitution parameter is much larger than the one obtained by estimating the standard representative agent model. Lastly, there is some evidence of structural changes over the sample period, which are associated with the 1982 recession.

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Bibliographic Info

Paper provided by University of Waterloo, Department of Economics in its series Working Papers with number 9315.

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Length: 26 pages
Date of creation: 1993
Date of revision:
Handle: RePEc:wat:wpaper:9315

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Postal: Waterloo, Ontario, N2L 3G1
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Web page: http://economics.uwaterloo.ca/
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Related research

Keywords: demand ; money ; money supply ; consumption;

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Cited by:
  1. Bacchetta, Philippe & Gerlach, Stefan, 1997. "Consumption and credit constraints: International evidence," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 207-238, October.
  2. Sarantis, Nicholas & Stewart, Chris, 2003. "Liquidity constraints, precautionary saving and aggregate consumption: an international comparison," Economic Modelling, Elsevier, vol. 20(6), pages 1151-1173, December.
  3. Sydney Ludvigson & Christina H. Paxson, 1997. "Approximation bias in linearized Euler equations," Research Paper 9712, Federal Reserve Bank of New York.
  4. Henry, O. & Messinis, G. & Olekalns, N., 1999. "Rational Habit Modification: the Role of Credit," Department of Economics - Working Papers Series 729, The University of Melbourne.

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