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Excess sensitivity of consumption, liquidity constraints, and mandatory saving

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  • Cheolbeom Park
  • Pei Fang Lim

Abstract

Using Singapore mandatory saving system, it is examined whether liquidity constraint is a major reason for the excess-sensitivity of consumption to predictable income growth. Although the mandatory saving rate for employees could be a good measure for the financial condition of a liquidity-constrained consumer, it is found, through the nonlinear instrumental variable estimation, that consumption growth is not sensitive to changes in the mandatory saving rate for employees. This finding suggests that liquidity constraints would not be a major reason for the excess-sensitivity puzzle.

Suggested Citation

  • Cheolbeom Park & Pei Fang Lim, 2004. "Excess sensitivity of consumption, liquidity constraints, and mandatory saving," Applied Economics Letters, Taylor & Francis Journals, vol. 11(12), pages 771-774.
    • Handle: RePEc:taf:apeclt:v:11:y:2004:i:12:p:771-774
    DOI: 10.1080/1350485042000240101
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    Cited by:

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