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Intertemporal substitution in consumption : evidence for some high- and middle-income countries

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  • Pedersen, Karsten N.

Abstract

This paper attempts to find support for the life-cycle model of consumption under the assumption that some consumers are excluded from the credit market. An intertemporal model of consumption is put forward that allows a fraction of consumers to be credit rationed. The model defines credit rationing as the constraints on consumption created by lack of access to credit markets. If consumers are unable to borrow against human wealth and have no financial wealth, consumption is bound to current income. In particular, the role of quantitative instruments applied by monetary authorities and the evolution of financial markets are examined. Hence, the fraction of consumers that are rationed is allowed to change over time. The model is estimated using annual data for Brazil, Germany, Japan, Korea, Malaysia and the United States. Three"middle-income"developing countries are used to see if there is support for the life-cycle model of consumption in less developed economies. For comparative purposes three high-income countries with high quality data are also investigated. Throughout the examination it is assumed that expectations are formed rationally. This report briefly summarizes the results of a number of earlier empirical studies, and develops the regression model from the life-cycle model of consumption, with and without credit constraints.

Suggested Citation

  • Pedersen, Karsten N., 1991. "Intertemporal substitution in consumption : evidence for some high- and middle-income countries," Policy Research Working Paper Series 641, The World Bank.
  • Handle: RePEc:wbk:wbrwps:641
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    References listed on IDEAS

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