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Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation

  • Garcia, Rene
  • Lusardi, Annamaria
  • Ng, Serena

Most empirical studies on liquidity constraints classify a consumer as being constrained on the basis of a single indicator such as the asset to income ratio. In this analysis, the authors model the probability that a consumer faces liquidity constraints as a function of multiple social and economic factors. This probability function is estimated simultaneously with the degree of excess sensitivity of consumption to income in a switching regressions framework. The switching regressions apply optimal weights to the densities for the Euler equations in the two states and are less susceptible to sample misclassification. Our results based on data from the CEX confirm that liquidity constrained consumers are excessively sensitive to variables already known to economic agents. However, there is also evidence that the unconstrained consumers exhibit behavior that is inconsistent with the theoretical predictions. Further analysis suggests that such behavior could be explained by time non-separable preferences. Copyright 1997 by Ohio State University Press.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 29 (1997)
Issue (Month): 2 (May)
Pages: 154-76

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Handle: RePEc:mcb:jmoncb:v:29:y:1997:i:2:p:154-76
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Bowman, David & Minehart, Debby & Rabin, Matthew, 1993. "Loss Aversion in a Savings Model," Department of Economics, Working Paper Series qt0gf4p3ts, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Janice C. Eberly, . "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Rodney L. White Center for Financial Research Working Papers 22-91, Wharton School Rodney L. White Center for Financial Research.
  3. Attanasio, O.P. & Browning, M., 1993. "Consumption Over the Life Cycle and Over the Business Cycle," Papers 9314, Tilburg - Center for Economic Research.
  4. Altonji, Joseph G & Siow, Aloysius, 1987. "Testing the Response of Consumption to Income Changes with (Noisy) Panel Data," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 293-328, May.
  5. Abel, A.B., 1990. "Asset Prices Under Habit Formation And Catching Up With The Joneses," Weiss Center Working Papers 1-90, Wharton School - Weiss Center for International Financial Research.
  6. Attanasio, Orazio P., 1995. "The intertemporal allocation of consumption: theory and evidence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 39-56, June.
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