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Excess Sensitivity in Consumption without Liquidity Constraint: Evidence from Monthly Household Panel Data

The monthly salaries and allowances of Korean government employees are known in advance but vary greatly throughout the year. Using a large Korean monthly panel data set from 1994 to 2003, we examine how nondurable consumption expenditure in households headed by government employees responds to predictable income changes. We find excess sensitivity in consumption during the pre-Asian financial crisis era in households headed by young government employees with low liquid assets or low income. These household features are commonly associated with liquidity constraints. Further analysis shows that despite the apparent association, liquidity constraint is not the most convincing explanation for the excess sensitivity. Instead, the empirical finding is consistent with the theory that certain households deviate from consumption smoothing when the effort involved exceeds the welfare gained.

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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0714.

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Length: 45 pgs.
Date of creation: 22 Aug 2007
Date of revision:
Handle: RePEc:umc:wpaper:0714
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  18. Chang-Tai Hsieh, 2003. "Do Consumers React to Anticipated Income Changes? Evidence from the Alaska Permanent Fund," American Economic Review, American Economic Association, vol. 93(1), pages 397-405, March.
  19. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
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