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Determinants of consumption smoothing

  • G. PEERSMAN

    ()

  • L. POZZI

    ()

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.

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File URL: http://wps-feb.ugent.be/Papers/wp_04_231.pdf
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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 04/231.

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Length: 29 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:rug:rugwps:04/231
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  1. Vermeulen, Philip, 2000. "Business fixed investment: evidence of a financial accelerator in Europe," Working Paper Series 0037, European Central Bank.
  2. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
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  9. S. Rao Aiyagari & Ellen R. McGrattan, 1997. "The optimum quantity of debt," Staff Report 203, Federal Reserve Bank of Minneapolis.
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  12. John Y. Campbell, 1986. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," NBER Working Papers 1805, National Bureau of Economic Research, Inc.
  13. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 309-340.
  14. Philippe BACCHETTA & Stefan GERLACH, 1997. "Consumption and Credit Constraints : International Evidence," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9707, Université de Lausanne, Faculté des HEC, DEEP.
  15. McKeirnan, Barbara, 1996. "Consumption and the credit market," Economics Letters, Elsevier, vol. 51(1), pages 83-88, April.
  16. Anil K Kashyap & Owen A. Lamont & Jeremy C. Stein, 1994. "Credit Conditions and the Cyclical Behavior of Inventories," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 565-592.
  17. Marjorie Flavin, 1985. "Excess Sensitivity of Consumption to Current Income: Liquidity Constraints or Myopia?," Canadian Journal of Economics, Canadian Economics Association, vol. 18(1), pages 117-36, February.
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