IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

The Cross-Euler Equation Approach to testing for the Liquidity Constraint: Evidence from Macro and Micro Data

  • Shin-Ichi Nishiyama

In this paper, we propose a new empirical method in testing for the existence of liquidity constraint utilizing the concept of Cross-Euler equation. The Cross-Euler equation represents the optimal consumption pattern of a good in the current period to another good at a future period. It can be interpreted as the composite optimal condition that embeds both intertemporal and intratemporal optimal consumption relationships into one equation. The Cross-Euler equation has an advantage over the standard Euler equation, in the sense that the cointegrating relationship is maintained even when the liquidity constraint is present in the agent's decision problem. Thus, by comparing the preference parameter estimates from the Cross-Euler equation to those from the standard Euler equation, it is possible to detect the existence of a liquidity constraint. We adopt standard two goods version of Life-Cycle model to study the consumption behavior of necessity goods and luxury goods. First, based on the aggregate data, the test rejects the null of no liquidity constraints for necessity goods, while accpeting the null for luxury goods. Since, by construction, large share of necessity goods are consumed by poor households, it is possible to interpret the results as evidence that poorer households are likely to be liquidity constrainted. Next, we construct synthetic panel data from the Consumer Expenditure Survey where households have been classified to cohorts by their ages and educational attainments. Again, taking the Cross-Euler equation approach in testing for the liquidity constraints, the test rejected the null of no liquidity constraint for low-education cohorts, while accepting the null for high-education cohorts. Taking an education level as a proxy for permanent income, the test results were consistent with the view that poorer agents are more likely to be liquidity constrained.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hdl.handle.net/10097/55405
Download Restriction: no

File URL: http://ir.library.tohoku.ac.jp/re/bitstream/10097/55405/1/terg273.pdf
Download Restriction: no

Paper provided by Graduate School of Economics and Management, Tohoku University in its series TERG Discussion Papers with number 273.

as
in new window

Length: 44 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:toh:tergaa:273
Contact details of provider: Postal:
Kawauchi, Aoba-ku, Sendai 980-8476

Web page: http://www.econ.tohoku.ac.jp/econ/english/index.html
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Moffitt, Robert, 1993. "Identification and estimation of dynamic models with a time series of repeated cross-sections," Journal of Econometrics, Elsevier, vol. 59(1-2), pages 99-123, September.
  2. Richard H. Clarida, 1992. "Cointegration, aggregate consumption, and the demand for imports: a structural econometric investigation," Research Paper 9213, Federal Reserve Bank of New York.
  3. Attanasio, Orazio P, et al, 1999. "Humps and Bumps in Lifetime Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 22-35, January.
  4. Shea, John, 1995. "Union Contracts and the Life-Cycle/Permanent-Income Hypothesis," American Economic Review, American Economic Association, vol. 85(1), pages 186-200, March.
  5. Weise, Charles L, 1999. "The Asymmetric Effects of Monetary Policy: A Nonlinear Vector Autoregression Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 85-108, February.
  6. Orazio P. Attanasio & Guglielmo Weber, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 631-649.
  7. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  8. Stoker, Thomas M, 1993. "Empirical Approaches to the Problem of Aggregation Over Individuals," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1827-74, December.
  9. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  10. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-79, July.
  11. Orazio P. Attanasio & Guglielmo Weber, 1994. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," NBER Working Papers 4795, National Bureau of Economic Research, Inc.
  12. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
  13. David B. Gross & Nicholas S. Souleles, 2001. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," NBER Working Papers 8314, National Bureau of Economic Research, Inc.
  14. Richard Blundell & Martin Browning & Costas Meghir, 1994. "Consumer Demand and the Life-Cycle Allocation of Household Expenditures," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 57-80.
  15. Choi, Woon Gyu, 1999. "Asymmetric Monetary Effects on Interest Rates across Monetary Policy Stances," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 386-416, August.
  16. Dolores Collado, M., 1997. "Estimating dynamic models from time series of independent cross-sections," Journal of Econometrics, Elsevier, vol. 82(1), pages 37-62.
  17. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
  18. Ogaki, M., 1990. "Engel'S Law And Cointegration," RCER Working Papers 228, University of Rochester - Center for Economic Research (RCER).
  19. Meghir, Costas & Weber, Guglielmo, 1996. "Intertemporal Nonseparability or Borrowing Restrictions? A Disaggregate Analysis Using a U.S. Consumption Panel," Econometrica, Econometric Society, vol. 64(5), pages 1151-81, September.
  20. DeJuan, Joseph P. & J. Seater, John, 1999. "The permanent income hypothesis:: Evidence from the consumer expenditure survey," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 351-376, April.
  21. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  22. repec:fth:harver:1435 is not listed on IDEAS
  23. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  24. 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.
  25. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
  26. Fumio Hayashi, 1985. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1083-1113.
  27. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:toh:tergaa:273. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tohoku University Library)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.