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Determinants of consumption smoothing

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  • G. PEERSMAN

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  • L. POZZI

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Abstract

As 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.

Suggested Citation

  • G. Peersman & L. Pozzi, 2004. "Determinants of consumption smoothing," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/231, Ghent University, Faculty of Economics and Business Administration.
  • Handle: RePEc:rug:rugwps:04/231
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    File URL: http://wps-feb.ugent.be/Papers/wp_04_231.pdf
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    References listed on IDEAS

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    8. Beetsma, Roel M.W.J. & Jensen, Henrik, 2005. "Monetary and fiscal policy interactions in a micro-founded model of a monetary union," Journal of International Economics, Elsevier, vol. 67(2), pages 320-352, December.
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    13. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-1273, November.
    14. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, pages 1329-1368.
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    Cited by:

    1. Berben, Robert-Paul & Brosens, Teunis, 2007. "The impact of government debt on private consumption in OECD countries," Economics Letters, Elsevier, vol. 94(2), pages 220-225, February.
    2. Jose Luengo-Prado, Maria, 2006. "Durables, nondurables, down payments and consumption excesses," Journal of Monetary Economics, Elsevier, pages 1509-1539.
    3. Martin Sommer, 2002. "Supply Shocks and the Persistence of Inflation," Economics Working Paper Archive 485, The Johns Hopkins University,Department of Economics.
    4. Kutlu, Levent & Sickles, Robin C., 2012. "Estimation of market power in the presence of firm level inefficiencies," Journal of Econometrics, Elsevier, pages 141-155.

    More about this item

    Keywords

    Private consumption; liquidity constraints; consumption smoothing; excess sensitivity; Kalman filter; state-space models.;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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