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How Important Are Liquidity Constraints for Canadian Households? Evidence from Micro-Data

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  • Umar Faruqui
  • Samah Torchani

Abstract

Using a unique micro-dataset containing real and financial information on Canadian households for 2000–07, the authors address two questions: (1) What is the proportion of households whose consumption displays excess sensitivity to income, and who are likely liquidity constrained? (2) Do house prices affect the ability of Canadian households to smooth their consumption? The authors find that, on average (over the 2000–07 period), about 23 per cent of households in Canada were constrained. Their results suggest that young households with fewer liquid assets, higher education and lower home equity, as well as those that are unmarried, are more likely to be liquidity constrained than other households. The authors’ results also suggest that larger housing equity tends to facilitate consumption smoothing for households in Canada. This provides empirical evidence of a collateral channel linking house prices and consumption.

Suggested Citation

  • Umar Faruqui & Samah Torchani, 2012. "How Important Are Liquidity Constraints for Canadian Households? Evidence from Micro-Data," Discussion Papers 12-9, Bank of Canada.
  • Handle: RePEc:bca:bocadp:12-9
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    References listed on IDEAS

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    1. Richard Disney & John Gathergood, "undated". "House Price Volatility and Household Indebtedness in the United States and the United Kingdom," Discussion Papers 09/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    2. Garcia, Rene & Lusardi, Annamaria & Ng, Serena, 1997. "Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 154-176, May.
    3. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-346, April.
    4. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
    5. Orazio Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2005. "Consumption, house prices and expectations," Bank of England working papers 271, Bank of England.
    6. Runkle, David E., 1991. "Liquidity constraints and the permanent-income hypothesis : Evidence from panel data," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 73-98, February.
    7. Campbell, John Y. & Cocco, Joao F., 2007. "How do house prices affect consumption? Evidence from micro data," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 591-621, April.
    8. Lise Pichette, 2004. "Are Wealth Effects Important for Canada," Bank of Canada Review, Bank of Canada, vol. 2004(Spring), pages 29-35.
    9. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
    10. Benito, Andrew & Mumtaz, Haroon, 2009. "Excess Sensitivity, Liquidity Constraints, And The Collateral Role Of Housing," Macroeconomic Dynamics, Cambridge University Press, vol. 13(03), pages 305-326, June.
    11. Charles Grant, 2007. "Estimating credit constraints among US households," Oxford Economic Papers, Oxford University Press, vol. 59(4), pages 583-605, October.
    12. Tullio Jappelli, 1990. "Who is Credit Constrained in the U. S. Economy?," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 219-234.
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    Cited by:

    1. He, Dong & Liao, Wei & Wu, Tommy, 2015. "Hong Kong's growth synchronization with China and the US: A trend and cycle analysis," Journal of Asian Economics, Elsevier, vol. 40(C), pages 10-28.
    2. Olivier Gervais & Marc-André Gosselin, 2014. "Analyzing and Forecasting the Canadian Economy through the LENS Model," Technical Reports 102, Bank of Canada.

    More about this item

    Keywords

    Economic models; Sectoral balance sheet;

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D30 - Microeconomics - - Distribution - - - General

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